GAIL does well; tariffs, volumes may moderate
GAIL (India) Ltd’s nearly 42% year-on-year jump in net profit to Rs1,310 crore for the September quarter didn’t bring much cheer, although it beat Street expectations. Its shares have fallen about 2% since Tuesday, when results were announced after markets closed.
One reason for the lack of enthusiasm could be that the better performance of the gas transmission business may not keep up. “The management highlighted that the growth was driven by a one-off spike in LNG (liquefied natural gas) demand from the power sector, and hence, it expects volume and tariff to moderate from 2QFY18 levels, going ahead,” wrote Dayanand Mittal, analyst at SBICAP Securities Ltd, in a report on 14 November.
In the September quarter, GAIL’s natural gas transmission volume rose around 6% compared to the June quarter. The gas trading business too performed well. On the other hand, the LPG and petrochemicals businesses disappointed.
Overall, a sharp improvement in Ebitda (up 35% year-on-year) on a revenue growth of 4.5%, and decline in both depreciation and finance costs helped the company report strong net profit growth. Ebitda stands for earnings before interest, tax, depreciation and amortization.
Despite the decline post-results, the GAIL stock has rallied quite a bit, rising 23% in the last three months. One reason for the optimism has been that concerns over its US LNG import contracts have eased to an extent. A sharp spike in spot LNG prices has narrowed the gap between US Henry Hub-linked prices.
Due to the spike in spot LNG price, there’s lower risks to un-contracted US volume as US cargoes are only 7% more expensive currently, pointed out analysts from Edelweiss Securities Ltd. Also, recent renegotiations of the Gorgon contract implies the likelihood of potential US renegotiation for GAIL, added the brokerage firm in a report on Tuesday.
The GAIL stock trades at 14.6 times estimated earnings for the next fiscal year, based on Bloomberg data. SBICAP expects FY18-20 earnings per share CAGR (compounded annual growth rate) of 20% owing to gas transmission— volume growth and higher tariff; petrochemicals—volume growth, and normalizing margins and volume growth in the LPG business.
Nevertheless, the sharp outperformance in the stock compared to the benchmark Sensex in recent months could mean that most of the good news is baked into the price.