GAIL: Higher costs, weaker petchem performance weigh on fourth quarter
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GAIL (India) Ltd announced its results after the markets closed, but investors perhaps had a hunch earnings will be below estimates. The company’s shares fell 2.5% on Monday, a day when the broad markets ended marginally positive. As it turns out, the gas transmission firm’s fourth-quarter profit was materially below expectations.
Earnings before interest, tax, depreciation and amortization (Ebitda) rose 27% to Rs1,555 crore, on the back of a 15% increase in revenue to Rs13,452 crore. While reported numbers look impressive, expectations were running high, thanks to the better profitability expected in the liquefied petroleum gas business and the continued ramp-up of its petrochemical capacity at Pata in Uttar Pradesh.
Analysts at Kotak Institutional Equities, for instance, were expecting an Ebitda of Rs1,979 crore, an increase of 67% over the year-ago profits.
Two major factors affected performance. First, operating costs, especially employee costs, were higher than expected. Two, the performance of the petrochemicals business turned out to be muted.
Employee costs rose by as much as 120% year-on-year. Analysts expect GAIL’s analysts meet, to be held on Tuesday, to shed more light on the reasons for higher employee costs and whether there are any one-off elements in them. Input costs too were higher than expected.
And although the petrochemicals business was expected to do well because of the capacity expansion, operating profit of the segment halved compared to the December quarter. This was despite the fact that volumes of the petrochemicals business were strong. And even though the performance of the natural gas transmission services was decent, profitability of the natural gas marketing business disappointed.
Below the operating expenses line, there was a large exceptional item related to impairment of an investment that impacted net profit further. According to an analyst, net profit even after adjusting for this item is lower than expectations. And performance would have been worse if it wasn’t for the strong growth in other income.
GAIL’s shares have risen by 18.5% this year and trade at 13.4 times estimated earnings for this fiscal year. While the results are disappointing, management comments or guidance on volume and utilization for this fiscal year at the analysts’ meet should offer clues for the stock performance in the coming days.