GAIL (India) Ltd reported higher than estimated earnings before interest, tax, depreciation and amortization (Ebitda) at Rs1,270 crore (against an estimate of Rs1,130 crore), led by lower than expected subsidy. Against our estimate of Rs620 crore, it’s provisional subsidy was Rs460 crore. Adjusting for the estimated short provision of Rs160 crore in the third quarter of FY10, it’s operating numbers are largely in line with our estimates.
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Transmission volumes at 109 million standard cu. m per day (mscmd) and one-time staff cost affected margins.
Volumes averaged 109 mscmd (up 29% year-on-year, or y-o-y, and up 2% quarter-on-quarter, or q-o-q). Earnings before interest and tax (Ebit)/thousand standard cu. m declined from Rs630 in the second quarter of FY10 to Rs594, led by one-time staff expenses of Rs100 crore. We expect volume to ramp up, led by KG D6 and Petronet’s expanded Dahej terminal volumes. We have built in average volume (in mscmd) of 115 in the fourth quarter of FY10, 132 in FY11, increasing to 208 in FY14.
GAIL’s subsidy is on a provisional basis (similar to the second quarter of FY10) and was short by Rs160 crore compared with our estimate of Rs620 crore. We expect the fourth quarter of FY10 subsidy to be higher due to providing for short provision in the third quarter of FY10 (built in our estimates), and higher oil price. We currently build in GAIL’s subsidy burden at 13% of upstream, which is expected to bear 100% of auto fuel under-recoveries. We have built in upstream share at 90% of the auto fuel under-recovery in our FY11 estimates.
Petrochemical Ebit was Rs340 crore (up 163% y-o-y and up 24% q-o-q). Sales volumes were 120kt (up 36% q-o-q and down 7.7% y-o-y). Sequential volume growth was primarily due to clearance of the second quarter of FY10 inventory. In the second quarter of FY10, GAIL had sold 88kt against production of 102kt.
We remain positive on GAIL primarily due to long-term revenue visibility, value creation through the city gas distribution (CGD) business, potential upside from its exploration and production (E&P) business, and likely favourable policy decision on subsidy.
Key events to watch would be finalization of GAIL’s transmission tariffs by the Petroleum and Natural Gas Regulatory Board, and increase in its transmission volumes. We value GAIL on sum-of-the-parts basis at Rs485 per share (core business at 14x estimated FY12 earnings per share (EPS), investment value of Rs54 per share and E&P value of Rs23 per share). We believe there is a further upside potential of at least Rs27 per share from its CGD business. Adjusted for investments, the stock trades at 12.4x estimated FY12 EPS of Rs29.20. We maintain buy.
Illustration by Shyamlal Banerjee and Graphics by Yogesh Kumar/Mint