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Transmitting Growth

GAIL plans to expand its transmission capacity, which would mean more volumes & higher tariffs…

India’s biggest natural gas transmission company, GAIL, is on a spending spree. It plans to expand its transmission capacity from the current network of about 9,000+ km to 14,000+ km by FY15. The incremental capacity would mean more volumes and higher tariffs for those incremental volumes. This is expected to drive topline growth for the company for the next couple of years. Additionally, GAIL is also commissioning a petrochem plant in UP; expected to start operations from CY13.

Lower subsidy gains: Q1FY13 Ebit was up 74 per cent (q-o-q) on the back of lower subsidy sharing which came in at Rs 700 crore (Q1FY13) compared to Rs 1,398 crore (Q4FY12). As a result, net profit was up 15 per cent (y-o-y) and 135 per cent (q-o-q). The Q1 subsidy means that GAIL’s share in upstream subsidy has declined from 5.8 per cent in FY12 to current levels of 4.6 per cent. Analysts at Motilal Oswal estimate GAIL could end the current financial year with a slightly higher share of 5.5 per cent.

One time gain: Gas trading Ebit at Rs 495.6 crore gained on one time inventory gains on the back of higher spot LNG volumes of around 4 mmscmd, higher LNG realisation and a weak rupee. A change in product mix towards the higher (marketing) margin LNG positively impacted overall Ebit. According to analysts, this gain was a one-off, the impact of which could be minimal going forward.

Petchem drag: Petchem saw sales volumes decline 25 per cent (y-o-y) and 44 per cent (q-o-q) because of a capacity shutdown. As a result, petchem Ebit was down 20 per cent (y-o-y) and 55 per cent (q-o-q) in spite of higher realisation which was up 20 per cent (y-o-y) and 7 per cent (q-o-q). Though petchem volumes are expected to go up in the next quarter, weak demand environment and greater supplies from the Middle East should cap any large realisation jumps.

Lower gas transmission volumes: The latest quarter saw gas transmission volumes fall by 5.8 mmscmd (q-o-q). Part of this decline could be attributed around 3 mmscmd KG-D6 volume decline while the remaining to seasonal closure by fertiliser plants who would have in turn demanded lower gas volumes. Gas transmission Ebit was higher by 4 per cent (y-o-y) and 14 per cent (q-o-q) owing to higher transmission tariff of Rs 916/mscm. Gas transmission volumes are not expected to jump any time soon but could see an improvement only by the end of the current financial when its Dabhol terminal and PLNG’s Kochi terminal come online.

Outlook and valuation. In the medium term, with stagnant gas transmission volumes and an ad hoc subsidy sharing burden headache to deal with, GAIL’s earnings are expected to remain flat. Also, the KG-D6 volume stagnation will cap any transmission gains. At the CMP, the stock trades at 12 times its TTM earnings. Wait for more clarity on gas transmission volumes and subsidy sharing burden before entering.