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Spark Capital: GAIL 3QFY13 results review: In line quarter; Underperformance provides valuation comfort- Maintain ADD




Spark Capital Advisors(India) Private Limited


15 Feb 2013





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In line quarter; Underperformance provides valuation comfort- Maintain ADD GAIL reported in line results with EBITDA (pre subsidy) growing 13% yoy and 19% qoq mainly due to strong LPG realisations, better petchem volumes and high trading profits, offsetting the impact of exploratory write offs worth Rs. 0.6bn. Core Gas transmission biz recorded stable EBIT of Rs. 6.2bn flat yoy and up 2% qoq despite a 0.6mmscmd fall in volumes qoq due to “take or pay” compensations and lack of one-off provisions. Petchem volumes revived driven by liquidation of inventory and strong demand. The beat at petchem volumes got offset by surprisingly high opex (up 50% qoq). LPG & OHC EBIT (pre-subsidy) surged by ~42% both yoy and qoq driven by strengthening of benchmark prices. LPG subsidy remain stable at Rs. 21bn for 9M and Rs. 6bn for 3Q. Gas trading also recorded a strong EBIT of ~Rs. 3bn, up 22% qoq on higher spot margins. While we remain cautious on the petchem margins given cost escalation risks related to gas price hikes, the current underperformance (13% since our downgrade on 21st Jan’13) provides valuation comfort. Given the strong long term prospects, all round presence in the gas sector, and dividend yield of ~3%, we maintain ADD on the stock Gas transmission outlook: Volumes declined by 0.6% qoq to ~105mmscmd as increased LNG imports reduced the impact of fall in KG D6. Dabhol LNG has already started commercial operation and Kochi LNG is set commence operations in April’13. This would support volume growth in FY14-15 Dabhol Terminal: Terminal has been commisioned in Jan’13 and received one commissioning cargo and the first commercial cargo till date. Initial volumes are likely to be low at 1.2mmtpa. Management is confident to achieve higher volumes in FY15 and expect regas charges of more than Rs. 40/mmbtu. Capacity is set to increase to 5mmtpa after completion of breakwater facility by CY15. The Dabhol–B’lore PL is also partly complete and would be fully operational over next six months Kochi –B’lore PL: Phase I PL (Kochi region 1-1.2mmtpa) is largely complete and Ph II PL (4mmtpa) is expected to be delayed till Mar’14. GAIL is facing Right of Use (ROU) issues in certain sections of the PL and are directly in talks with the respective State Govts to resolve the same. The issues in the Kerela section have been resolved and work is likely to start soon. However, the deadlock remains in the Tamil Nadu sections Gas price hike: Gail consumes domestic gas (4-5mmscmd) in LPG/Petchem production. This is a mix of APM, PMT, KGD6 and others. Assuming, $2/mmbtu hike across domestic gas supplies over next 1-1.5years, there would be a negative impact of Rs. 4bn on PAT and around Rs. 8bn in case of $4 hike

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