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Business News/ Market / Mark-to-market/  Q1 results: Petrochemicals drag down GAIL India
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Q1 results: Petrochemicals drag down GAIL India

For petrochemicals, loss at Ebit level last quarter expanded to Rs300 crore from Rs154 crore in the March quarter

Analysts are not particularly encouraging about the outlook. For one, the fate of GAIL India’s petrochemicals business is not expected to improve overnight. Photo: Pradeep Gaur/MintPremium
Analysts are not particularly encouraging about the outlook. For one, the fate of GAIL India’s petrochemicals business is not expected to improve overnight. Photo: Pradeep Gaur/Mint

GAIL (India) Ltd’s June quarter financial performance was disappointing on many counts. But the performance of the petrochemicals business especially came as a big dampener. It wasn’t like analysts were expecting a lot from the segment but the reported performance is far worse.

For petrochemicals, loss at the earnings before interest and taxes (Ebit) level last quarter expanded to 300 crore from 154 crore in the March quarter, when the performance was affected on account of lower realizations and higher cost of feedstock. The company maintains that a shutdown at the Pata petrochemicals plant affected performance for the June quarter. Consequently, petrochemicals’ sales volumes and production declined substantially, both year-on-year and sequentially. Moreover, increased interest and depreciation charges after commissioning of expanded petrochemicals capacity too weighed on the performance.

Apart from the performance of the petrochemicals business, some other factors were discouraging, too. Analysts had expected transmission volumes to recover due to higher LNG offtake. But natural gas transmission volumes barely improved on a sequential basis. For the June quarter, transmission volumes stood at 87 million standard cubic metres per day (mscmd) compared with 86 mscmd in the March quarter. According to the company, lower price realizations and reduced production of LPG hit profits. On the brighter side, GAIL India’s natural gas trading business performed well and clocked an Ebit of 342 crore.

The upshot: GAIL India’s profit dropped 32% to 424 crore, against 674 crore that a Bloomberg poll of analysts had predicted. Revenues too declined 6% to 12,565 crore, missing Street estimates. Revenues had fallen 2% in the March quarter.

GAIL India has had a tough time delivering good financials in the past few quarters. In general, weaker transmission volumes and pressure on realizations across businesses have weighed on the stock. Not surprisingly, the GAIL India stock has declined 17% in 2015 against a 3% increase in the benchmark Sensex. Currently, the stock trades at 14 times its estimated earnings for this fiscal year.

Analysts are not particularly encouraging about the outlook. For one, the fate of GAIL India’s petrochemicals business is not expected to improve overnight. “With FY15 earnings down 30% year-on-year, we expect return on equity to recover only by FY18 when natural gas volumes improve," said a report from IIFL Institutional Equities on 15 July.

GAIL India trades at a 22% premium to its long-term, one-year forward price-to-earnings multiple, making valuations expensive, said the report.

The writer does not own shares in the above-mentioned companies.

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ABOUT THE AUTHOR
Pallavi Pengonda
Pallavi is a deputy editor at Mint and heads the Mark to Market team. This column covers wide-ranging topics related to the stock markets, offering an in-depth analysis of financial reports of companies. She writes and edits across verticals, covering the breadth of the Indian stock market. Pallavi has done her master of management studies, specializing in finance.
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Published: 23 Jul 2015, 08:57 PM IST
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