Lower subsidy leads to better-than-expected profit for GAIL

Lower subsidy leads to better-than-expected profit for GAIL

After Reliance Industries Ltd reported weak numbers for its petrochemicals business earlier this week, investors were prepared to see a similar performance by GAIL (India) Ltd’s petrochemicals business, too. And that is exactly what happened.

The petrochemicals business earnings before interest and tax (Ebit) margins of India’s largest gas transmission company fell to 38.2% in the June quarter from 44.6% in the same period last year. In the March quarter, Ebit margins from this segment stood at 42.3%. In general, the operating environment was weak for the petrochemicals business during the quarter.

That was not the only disappointment from GAIL’s June quarter results. Volumes of the natural gas transmission business fell to 117 million standard cubic metres per day (mscmd). The Street was expecting this metric to remain more or less flat sequentially at 120 mscmd.

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Sure, total operating revenue growth of 25% on a year-on-year basis looks decent, but that’s lower than about 35% revenue growth reported in the preceding March and December quarters.

While operating profit margins have slipped by 270 basis points on a year-on-year basis to 17.7%, they are higher on a sequential basis by 330 basis points because of lower costs. One basis point is one-hundredth of a percentage point.

GAIL’s net profit increased by 11% to 985 crore, which obviously looks much better when compared with the 14% decline in the March quarter. The company’s net performance is better than many analysts’ estimates. That’s purely because the subsidy shared by GAIL was lower than expected. GAIL’s subsidy burden stood at 682 crore, lower than 900 crore in the March quarter.

Analysts say the near-term outlook for GAIL’s petrochemicals business does not look great. Moreover, there are concerns on the under-utilization of the company’s new expanded transmission network from a medium-term perspective due to limited additional gas supplies.

Both these factors are likely to limit the gains in the stock for some time.

Graphic by Sandeep Bhatnagar/Mint

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