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Spark Capital - GAIL 1QFY14 Results Review: Falling KG supplies and lower realisations drag LPG into losses; Maintain ADD




Spark Capital Advisors(India) Private Limited


26 Jul 2013





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GAIL 1QFY14 Results Review: Falling KG supplies and lower realisations drag LPG into losses; Maintain ADD GAIL reported EBITDA (pre subsidy) of Rs. 21.6bn, down 17% yoy (+26% qoq) due to steep decline in LPG earnings and fall in gas trading margins over a high base, though Petchem and Gas transmission recorded better earnings. Replacement of KG D6 supplies (fell by 1mmscmd to 0.25mmscmd in 1Q became nil in June) with costly LNG, decline in LPG realisation (12% yoy) without any decrease in subsidy (provided Rs. 7bn, flat yoy and +19% qoq) led to an EBIT loss of Rs. 109mn (Rs. 4.4bn profit in 1QFY13) in the LPG segment. Gas trading volumes increased by 2% qoq and stable margins (Rs.405/mscm) led to EBIT of Rs. 3bn, though optically declining by 40% yoy due to one off gains in 1QFY13. Petchem volumes of 121KMT surprised positively as it declined only by 8% qoq (lesser than historical trend). Sustained Petchem margins and no shutdowns helped record EBIT of Rs. 4.4bn (+124% yoy). While Gas transmission volumes continue to be sluggish at 99mmscmd (flat qoq and -10% yoy), higher tariffs cushioned by “Ship or Pay” led to flat EBIT of Rs. 5.5bn. Overall, PAT declined by 29% yoy to Rs. 8bn. Earnings grew by 31% qoq due to one-off loss in 4Q. Incorporating earlier than expected termination of KG supplies in LPG, we increase our gas cost. Hence, our FY14E EPS estimate stands reduced by 4%. While the stock lacks any strong near term trigger and risks persists on petchem/LPG margins, inexpensive valuations lead us to maintain ADD rating. Gas transmission outlook: Volumes of 99 mmscmd declined by 11% yoy due to falling KG D6 and softened LNG demand. While management expects to grow volumes marginally in FY14E on additional Dabhol and Kochi LNG supplies, we estimate 5% decline in FY14E and 10% growth in FY15E. GAIL targets to bring 34 LNG cargoes in FY14E as compared to 14 in FY13 (upside of 4.5mmscmd). LPG segment: GAIL consumes 2.9mmscmd of gas in LPG segment. In 1Q, it received domestic supplies of 1.85 (APM – 1.5; PMT – 0.1 and KG - 0.25) and the rest LNG. Against an allocation of 2.5mmscmd, KG supplies have come down to zero level in June. Opex increased by 62% yoy (+24% qoq) as dwindling KG supplies got replaced with LNG. Since GAIL shares subsidy burden as it has allocation of inexpensive gas, there is a strong rational for reduction in subsidies in line with fall in domestic supplies. Petchem: Currently, GAIL gets 1.3mmscmd of domestic gas (APM-1.2 and PMT – 0.1) and procures 1.1mmscmd of RLNG in its Petchem units. Doubling of APM gas prices would impact Petchem EBIT by Rs. 4bn in FY15E

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