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Spark Capital: GAIL 2QFY13 Results Review : Tepid quarter; Remains an attractive defensive- Maintain Buy




Spark Capital Advisors(India) Private Limited


01 Nov 2012





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Tepid quarter; Remains an attractive defensive- Maintain Buy GAIL reported lower than expected results with EBITDA (pre subsidy) declining by 2% yoy and 17% qoq due to weaker LPG realisation, tepid petchem volumes and normal trading profits (vs. abnormal gains in 1Q). Core Gas transmission business recorded stable EBIT of Rs. 6bn up 9% yoy and 7% qoq despite a 4mmscmd fall in volumes qoq due to “take or pay” compensations and lack of any non-recurring provisions. Petchem volumes got suppressed due to competing cheaper imports, nevertheless high realisations led to stable EBIT of Rs. 4.2bn up 3% yoy. LPG & OHC segment EBIT of Rs. 0.7bn got beleaguered by weaker realisations and higher subsidy of Rs. 7.9bn (est. Rs. 6bn), realisations have bounced back in 3QFY13 though. Gas trading recorded a more normalised EBIT of Rs. 2.5bn, -15% yoy and -51% qoq as there were no one-time gains. Management targets trading profits of Rs. 12bn p.a going forward. Higher than expected other income partly cushioned earnings. Adjusted for the one-time retro provision of Rs. 0.8bn (total provision Rs. 1.23bn) in LPG transmission segment, underlying PAT of ~Rs. 11bn declined by 3% yoy and 7% qoq. We have increased our LPG/Petchem realisations to incorporate current uptick in benchmarks and higher currency. This got mostly offset by lower transmission and petchem volumes. While start up of Dabhol and Kochi LNG terminals would be near term triggers, earnings momentum would pick up only in FY15. Given the strong long term prospects, all round presence in the gas sector, and dividend yield of ~3%, valuations seem undemanding. Maintain Buy with TP of Rs. 415 Gas transmission outlook: Volumes declined by 4% qoq to ~106mmscmd as 2mmscmd decline in PMT added to the fall in KG D6, though PMT fall is likely to reverse in 3Q. As Dabhol and Kochi LNG terminals are likely to commence operations in 4QFY13, management is hopeful of exiting the year at 115-116mmscmd and likely to add more in FY14 Dabhol Terminal: Terminal is likely to kick start by Dec’12-Jan’13 with an initial capacity of 1.2mmtpa. Management is confident to achieve higher volumes in FY15 and expect regas charges to be upwards of Rs. 40/mmbtu. Capacity is set to increase to 5mmtpa after completion of breakwater facility by CY15. The Dabhol–B’lore PL would also be largely complete by Dec’12. The PL capex is likely to be

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