Weak petrochemicals, trading drags down GAIL

Weak petrochemicals, trading drags down GAIL

The petrochemicals business delivered the worst performance in the December quarter with higher gas costs playing havoc with profit margins.

Many analysts rushed to cut their earnings estimates after GAIL (India) Ltd announced disappointing December quarter financial results after market hours on Friday. GAIL’s numbers fell below expectations on many fronts. The poor performance of natural gas trading, petrochemicals and liquified petroleum gas (LPG) and liquid hydrocarbons businesses more than compensated the improvement in the natural gas transmission business, which saw 24% increase in earnings before interest and tax (Ebit). Gas transmission volumes were sequentially better as well. The petrochemicals business delivered the worst performance in the December quarter with higher gas costs playing havoc with profit margins. As Motilal Oswal Securities Ltd pointed out, petrochemicals realizations were inline at Rs.111 per kg, but Ebit, or operating profit, was significantly below estimates at Rs.4.8 crore due to the large contribution (85%) of high cost liquefied natural gas (LNG) component in its feedstock. Unfortunately, the company could not reap the benefits of lower spot LNG prices, due to its long-term LNG contract. In a post-results conference call, GAIL said it is looking to replace some portion of its long-term LNG with spot LNG. That may offer some respite to margins. In natural gas trading, even as volumes improved sequentially, the segment was adversely affected by an inventory loss of Rs.95 crore, as spot LNG prices declined. The LPG and liquid hydrocarbons business accounted for subsidy burden of Rs.500 crore, which was related to the September quarter. The company’s September-quarter results were declared before the subsidy announcement by the government and did not include the impact of the subsidy burden then. Accordingly, on an overall basis, GAIL’s December-quarter net profit fell sharply by 64% over the year-earlier period to Rs.604 crore. Revenues declined by 6.7% to Rs.14,969 crore. Not surprisingly, the GAIL stock fell sharply on Monday in reaction to the results. The valuations appear attractive considering the stock trades at about 12 times its estimated earnings for the next financial year. But the outlook doesn’t get better. Weak spreads and higher gas costs are expected to keep the performance of the petrochemicals business lacklustre in the days to come. Secondly, there is no clarity on the subsidy sharing mechanism. Further, gas transmission volumes are unlikely to improve meaningfully from a near-term perspective. And then, there is a risk to LNG offtake. “Since long-term LNG is still about $14 per million metric British thermal unit (mmBtu) compared with spot LNG at $7 per unit, the ability of the company to sell volume remains under a cloud,” wrote analysts from Elara Securities (India) Pvt. Ltd.

The writer doesn’t own shares in the above-mentioned companies.


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