Natural gas company GAIL (India) Ltd posted profit after tax of Rs910 crore against our estimate of Rs780 crore, helped by a lower subsidy burden of Rs340 crore (against our estimate of Rs670 crore) and higher-than-expected petrochemical/liquefied petroleum gas realizations.
Earnings before interest, tax, depreciation and amortization was Rs1,320 crore against our estimate of Rs1,240 crore, up 38% year-on-year (y-o-y) and 4% sequentially.
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Reported subsidy in the March quarter was lower at Rs340 crore against our estimate of Rs670 crore. The reported subsidy in the fourth quarter of FY10 was after adjustment for over-provisioning of Rs58.4 crore in the previous quarter. Adjusting for this, GAIL’s subsidy burden was sequentially flat at Rs397 crore. This indicates absence of any formula for upstream companies (Oil and Natural Gas Corp. Ltd, Oil India Ltd and GAIL), directionally indicating that the government is trying to minimize the subsidy burden on GAIL.
Transmission volumes averaged 115 million standard cu. m per day (mscmd) in the fourth quarter of FY10 (up 39% y-o-y and 5% sequentially). We build in the average volume (in mscmd) at 128 in FY11, gradually increasing to 208 in FY14 (18% compounded annual growth rate).
Reported gas transmission earnings before interest and tax was Rs500 crore, lower than our estimate of Rs630 crore mainly due to a Rs140 crore provision (one-time) with retrospective effect (from 20 November 2008). This was due to a tariff revision by the Petroleum and Natural Gas Regulatory Board (PNGRB).
GAIL provided Rs140 crore against the difference in tariff (PNGRB approved tariff and the charged tariff), which is to be returned to customers from November 2008 to 31 March 2010. Adjusted for this provision, the average tariff during the quarter was Rs851 per mscm against Rs850 per mscm in the third quarter of FY10 and Rs867 per mscm in the fourth quarter of FY09.
Led by increased Krishna-Godavari D6 supplies, GAIL’s transmission volumes were up 35% y-o-y and 7% sequentially at 114.8 mscmd (against our estimate of 115 mscmd, 109 mscmd in the third quarter FY10 and 83 mscmd in the fourth quarter of FY09). GAIL’s transmission volumes are expected to increase after the de-bottlenecking in the Hazira-Vijaipur-Jagdishpur (HVJ) and Dahej-Vijaipur (DVPL) pipeline (additional capacity of 10-15 mscmd expected in October). As Reliance Industries Ltd is slated to increase production, we have also built in higher volumes for GAIL in our estimates—128 mscmd in FY11 against the actual volume of 107 mscmd in FY10.
GAIL had applied for tariff determination of the HVJ-DVPL network to PNGRB. PNGRB has segregated the tariff into two parts—for the existing network and for a new expanded DVPL network.
We value GAIL on an sum-of-the-parts basis at Rs515 (core business at 13 times estimated FY12 earnings per share), investment value of Rs41 per share and exploration and production value of Rs23 per share). We believe there is further upside potential.