Buy GAIL India; target of Rs 406: Emkay

“GAIL India, results were significantly below our and street expectation. Revenue for the quarter was at Rs.104.8bn, growth of 17.7% YoY. EBITDA during the quarter was at Rs.7.7bn, decline of 40% YoY and 57% QoQ. Lower than expected EBITDA was mainly due to one-off impact of retrospective cuts in Gas (Rs.2.5bn) and LPG (Rs.0.44mn) transmission tariff. During the quarter the company reported net profit of Rs.4.8bn, decline of 38% YoY. Subsidy payout grew by 18% YoY and 22% QoQ at Rs.10.6bn, mainly due to higher crude oil prices compared to previous year.”

“Gross margin in Transmission segment declined by 27% YoY 38% QoQ to Rs.4.5bn, more over volume and realisation also declined by 5% QoQ to 115.5mmscmd and 18% to Rs.0.74/scm, respectively. Lower transmission margin was mainly due to 1) company has provided provision of Rs.2.5bn for retrospective cut in tariffs for Mumbai gas network and Agartala gas network and 2) lower KG D6 volumes which is partially offset by RLNG. Moreover Gross margin in trading segment also declined by 38% YoY and 48% QoQ to Rs.1.7bn. Lower margins in trading was mainly due to 1)company has provided provision of Rs.400mn for debtors and 2) lower margin on spot LNG cargoes. However trading volume for the quarter remains flat on YoY and QoQ at 85.5mmscmd. We believe transmission volume for Q1 FY13 would be around 117-118mmscmd. During the quarter Gross margin in petchem has improved by 265bps YoY and 35bps QoQ to 50%, due to higher polymer sales and better realisation. Sales volumes have increased by 4.4% QoQ and realisation has increased by 5.3% QoQ to Rs.80.1/Kg.”

“Decline in domestic gas production leading to decline in transmission volumes would weigh on the stock. Also the recent news on proposed cap on gas marketing margin, which is to be decided by PNGRB would keep the stock under pressure until any clarity emerges. However we don’t see major earnings risk as it charges MoPNG-determined marketing margins on APM and PMT volume, which accounts for 80% of the total volume. Based on the lower volume outlook and concerns on marketing margin, we have lowered our PE multiple from 12x to 10x and cut our SOTP target price to Rs.406 from Rs.434 earlier. However recent correction in the stock price offers good buying opportunity. Hence we upgrade our ratings from Accumulate to Buy. At CMP, the stock trades at 9.7x FY14E EPS and 1.5x P/BV,” says Emkay Global Financial Services research report.   

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