Subsidy slam

Gas Authority of India’s (GAIL) first-cut numbers spooked the market. But a closer look shows higher subsidy burden, which the government has asked the company to bear, has had an impact. But for this subsidy, the company’s numbers have been much better than the Street’s expectation.

For the fourth quarter of last fiscal, GAIL posted a topline of Rs8,893 crore as compared to Rs6,522 crore in the same quarter in fiscal 2010.

Net profit fell 18% to Rs738 crore from Rs910.82 crore. Profit would have been much higher had it not been for the Rs901.71 crore provisions for under recoveries on sensitive petroleum products which was Rs338.41 crore in the corresponding quarter.

For the full year, sales were up 30% to Rs35,106.65 crore compared with Rs27,035.30 crore a year back, while profit was up 22% to Rs4,020.97 crore compared with Rs3,292.29 crore.

Subsidy outgo rocketed 60% to Rs2,111.24 crore against Rs1,326.73 crore previously.

Natural gas distribution business contributed Rs912.51 crore to sales against Rs739.48 crore previously.

The segments contribution to earning before interest and tax was Rs534.40 crore compared with Rs506.12 crore. Margins in the segment have come down from 68% to 58%.

Volume of gas transmitted was flat at around 120 mmscmd but average gas transmission realised has come down by 7% mainly due to a one-time provision of Rs116 crore on account of a 6.3% cut in pipelines tariff as suggested by Petroleum & Natural Gas Regulatory Board (PNGRB).

Natural gas trading increased from 83.6 mmscmd to 85.7 mmscmd, while net realisation increased from $0.03 per mmbtu to $0.20 per mmbtu mainly on account of higher share of regassified liquefied natural gas.

The LPG transmission division posted sales of Rs117.64 crore compared with Rs122.47 for the two quarters. However, LPG business slipped into losses of Rs72.79 crore. The incremental subsidies of the first three quarters were provided for in the fourth quarter, which led to the losses.

Petrochemicals division posted strong numbers with sales increasing from Rs822.31 crore to Rs1,030.68 crore. EBIT during the same period fell marginally from Rs446.84 crore to Rs436.69 crore.

Realisation per tonne in the petrochemicals segment was lower at Rs71,600 per tonne compared with Rs75,400 per tonne in the corresponding quarter.

Apart from the subsidy element, GAIL’s results has been above par. Going forward, the company is expected to benefit from an increased run rate of its petrochemical division and net realisation gas trading.

At the current price of Rs429, the stock trades at a PE of 13.5 times last year’s numbers. An increase in LPG prices by the group of ministers in the near future can be a good buy trigger, which will also improve the company’s financials as subsidy element will decrease.