GAIL India Oil Drilling And Exploration

GAIL India Ltd (Posted - 29 Jan 2012)
Gail India’s earnings for the quarter to December look good, but only because of a benign subsidy burden booked on a provisional basis.

This just adds to the growing list of uncertainties that the company has to face, including lack of visibility in gas volume growth and the government’s recent move to regulate marketing margins. It is hardly surprising to see the Gail stock drifting lower after the results were unveiled.

Gail’s 13% profit growth at Rs 1,091 crore was not a big surprise and is in line with its September quarter numbers. The 35% growth in net sales to Rs 11,294 crore proved to be the main driver. Other income dropped 89% to Rs 21.4 crore, while interest and depreciation grew in double-digits, while its effective tax rate rose to 31.7% from 28.1% last December.

What buoyed its performance was the subsidy of Rs 536.12 crore, which was accounted for on a provisional basis with the government yet to announce its share. When the government finally announces it, the amount could be substantially higher considering the government is cash-strapped. “For FY12, we model upstream subsidy share at 40% and, hence, major impact of subsidy will be in the March ’12 quarter as the actual subsidy in the first three quarters was based on a 33% upstream sharing assumption,” brokerage Motilal Oswal said in a report.

Gail is expected to complete a capex of nearly Rs 4,000 crore in FY12 and another Rs 9,000 crore in FY13. However, its natural gas volumes are unlikely to see much improvement. Increase in domestic production and imports are likely to be barely able to replace the dwindling KG-D6 volumes. This raises concern of under-utilisation of new pipelines in the medium term. Timely completion of its Dabhol terminal will be crucial for its volume growth. Most brokerages expect its FY13 volumes to average in the 119-123 mmscmd range from around 118 mmscmd for FY12. The government recently told the regulator, PNGRB, to determine marketing margins on natural gas sold by Indian players. If implemented, this will have a negative impact on Gail. The marketing margin of $0.24 per mmBtu contributed around 20% to Gail’s net income in the December quarter, according to a report from HSBC Global Research.
Source - Economic Times

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