Better than Expected, Accumulate

January 24, 2012

Results were above our estimate, with EBIDTA at Rs17.9bn Previous Reco Accumulate Target Price Rs.449
-3.8/5.3 -11.9 5,046 16,752

Reco Accumulate CMP Rs.368

and PAT at Rs10.9bn. Subsidy payout for Q3FY12 grew by 28% YoY to Rs5.3bn

Revenue from natural gas transmission grew by 6.5% to

EPS change FY11E/12E (%) Target Price change (%) Nifty Sensex

Rs10bn, While trading business grew by 38% to Rs.82.7bn YoY, mainly on the back of higher spot LNG volume marginally by 0.3% to 119mmscmd and 1.2% to 85mmscmd respectively, mainly driven by higher offtake of spot LNG which is to be decided by PNGRB would keep the stock under pressure until any clarity emerges. Maintain accumulate with TP of Rs.449

Sequentially, transmission and trading volume grew

Price Performance
(%) Absolute Rel. to Nifty
Source: Bloomberg

The recent news on proposed cap on gas marketing margin

3M 6M 12M (12) (21) (18) (8)

1M (5)

(12) (11) (11)

Highlights of the results

% 20

Relative Price Chart

500 Rs 470 14

440

410

380

-4

GAIL reported results which were inline with our estimates. Revenue for the quarter was at Rs.112.9bn, growth of 35% YoY, mainly due to better performance from petrochemical, Transmission and trading segment. EBITDA during the quarter was at Rs17.9bn, growth of 34.6%, YoY. During the quarter the company reported net profit of Rs10.9bn, growth of 12.8% YoY. Subsidy payout stood at Rs.5.3bn growth of 28% YoY, mainly due to higher crude oil prices compared to previous year.

350 Jan-11

Mar-11

May-11
Gail (India) (LHS)

Jul-11

Sep-11

Nov-11

-10 Jan-12

Rel to Nifty (RHS)

Better performance from Transmission and Trading segment drives the revenue and profitability in Q3 FY12
Revenue has increased by 35% to Rs112.9bn in Q3 FY12, mainly due to higher volume growth and higher realisation in both Transmission and Trading segment on the back of higher spot LNG offtake. During the quarter company has imported 4 LNG cargos. Transmission revenue grew by 0.3% to Rs.10bn, while volume and realisation grew by 0.3% to 119mmscmd and 9.4% to Rs.0.91/scm, QoQ respectively. While Trading revenue jumped 22.8% QoQ to Rs.82.6bn. Trading volume for the quarter stood at 85mmscmd against 84mmscmd sequentially. We believe transmission volume for Q4 FY12 would be around 119-121mmscmd.

Source: Bloomberg

Stock Details
Sector Bloomberg Equity Capital (Rs mn) Face Value (Rs) No of shares o/s (mn) 52 Week H/L (Rs) Market Cap (Rs bn/USD mn) Daily Avg Vol (No of shares) Daily Avg Turnover (US$ mn) Oil & Gas GAIL@IN 12685 10 1268 486/360 469/9,358 1239816 9.6

Petchem and LPG & LHC volume decline by 5% and 12% sequentially, on the back of plan shut down during the quarter.
During the quarter petchem and LPG & LHC volume declined by 5% to 0.359mnt and 12% to 0.113mnt QoQ mainly due to plan shutdown during the quarter. However realisation for both petrochemical and LPG segment grew by 6.8% to Rs.76.8/kg and 2.9% to Rs.26.9/kg.

Shareholding Pattern (%)

Dec-11 Sep-11 Promoters FII/NRI Institutions Private Corp Public
Source: Capitaline

Jun-11 57.4 13.8 18.5 1.2 9.2

57.4 14.4 17.9 1.2 9.2

57.4 14.3 18.0 1.2 9.2

Subsidy payout for Q3FY12 grew by 28% YoY to Rs5.3bn

During the quarter, subsidy payout stood at Rs.5.3bn, growth of 28% YoY. However on sequential basis under recover was declined by 5%. We understand there was no communication from ministry on subsidy share for the quarter. Hence the subsidy burden accounted on ad-hoc basis.

Financial Snapshot
YEMar FY10A FY11E FY12E FY13E Net Sales 249964 326690 404338 448109 EBITDA (Core) 46276 54000 61604 62285 (%) 18.5 16.6 15.2 13.9 APAT 31391 35611 37595 38512 EPS (Rs) 24.7 28.1 29.6 30.4 EPS % chg 12.0 13.4 5.6 2.4 RoE (%) 19.9 19.7 18.1 16.5 P/E 14.9 13.1 12.4 12.1 EV/ EBITDA 9.1 8.6 8.1 8.9

(Rs.mn)
P/BV 2.8 2.4 2.1 1.9

Dhaval Joshi dhaval.joshi@emkayglobal.com +91 22 6612 1282 Jagdish Meghnani jagdish.meghnani@emkayglobal.com +91 22 6612 1285

Emkay Global Financial Services Ltd

Result Update

GAIL Ltd

GAIL Ltd Financial Snapshot

Rs mn Revenue Expenditure as % of sales Consumption of RM as % of sales Employee Cost as % of sales Other expenditure as % of sales EBITDA Depreciation EBIT Other Income Interest PBT Total Tax Adjusted PAT (Profit)/loss from JV's/Ass/MI APAT after MI Extra ordinary items Reported PAT Reported EPS Margins (%) EBIDTA EBIT EBT PAT Effective Tax rate 15.9 14.0 16.1 11.5 28.1 14.5 12.6 12.8 8.8 31.2 17.7 15.7 16.2 11.1 31.8 17.2 15.2 16.1 11.3 30.2 15.9 14.1 14.1 9.7 31.7 Q3 FY11 83836 70505 84.1% 62689 74.8% 1604 1.9% 6212 7.4% 13331 1605 11726 1906 165 13467 3791 9676 0 9676 0 9676 7.6 Q4 FY11 89089 76212 85.5% 67240 75.5% 2750 3.1% 6221 7.0% 12877 1672 11205 525 341 11389 3558 7831 0 7831 0 7831 6.2 Q1 FY12 88890 73118 82.3% 66026 74.3% 1782 2.0% 5309 6.0% 15772 1782 13991 647 208 14429 4582 9847 0 9847 0 9847 7.8 Q2 FY12 97264 80509 82.8% 71330 73.3% 1779 1.8% 7400 7.6% 16755 2008 14748 1160 226 15682 4738 10944 0 10944 0 10944 8.6 Q3 FY12 112942 94993 84.1% 85745 75.9% 1983 1.8% 7265 6.4% 17949 1975 15974 214 207 15980 5066 10915 0 10915 0 10915 8.6 12.8 12.7 (bps) -0.9 15.7 -191.4 -187.8 355.2 -0.3 -0.3 (bps) -133.5 -101.9 -197.4 -158.8 149.0 16.9 14.9 15.4 10.6 31.2 12.8 -0.3 34.6 23.0 36.2 -88.8 25.8 18.7 33.6 12.8 7.1 -1.6 8.3 -81.6 -8.5 1.9 6.9 -0.3 16.9 -1.8 23.6 11.5 36.8 20.2 YoY (%) 34.7 34.7 QoQ (%) 16.1 18.0 9M FY12 299096 248619 83.1% 223101 74.6% 5544 1.9% 19974 6.7% 50476 5764 44712 2020 641 46091 14386 31705 0 31705 0 31705 25

Result Update

9M FY11 236276 193828 82.0% 173282 73.3% 4776 2.0% 15770 6.7% 42448 4831 37617 3882 487 41012 13230 27782 0 27782 0 27782 22

YoY (%) 26.6 28.3 28.8 16.1 26.7 18.9 19.3 18.9 -48.0 31.6 12.4 8.7 14.1 14.1 14.1 14.1 (bps)

18.0 15.9 17.4 11.8 32.3

-108.9 -97.2 -194.8 -115.8 -104.7

Revised estimates
We have tweaked our estimates marginally for FY12E & FY13E based on the higher under recovery assumption.
FY12E Rs bn Sales EBIDTA % margin PAT EPS Old 376.6 63.9 17.0 39.0 30.8 New 405.1 61.6 15.2 37.6 29.6 %Chg 7.6 -3.6 -176.1 -3.6 -3.8 Old 432.2 69.7 16.1 40.7 32.1 FY13E New 448 62.3 13.9 38.5 30.4 %Chg 3.7 -10.6 -222.1 -5.4 -5.3

Outlook and Valuation

Better Q3 FY12E results were mainly driven by performance from trading and transmission segment. Also subsidy burden was lower as compared to expectations at Rs6.8bn. We have positive bias on GAIL, given its dominant market share in transmission business. However lack of visibility on gas volume growth front on the back of delays in increase of domestic gas production, would weigh on the stock. We factor in 125mmcsmd for FY13E v/s 118.5mmscmd in FY12E. Also the recently 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. Currently, stock trades at 12x FY13E EPS and 1.9x P/BV, we maintain ACCUMULATE ratings on GAIL with the revised TP of Rs.449.

Emkay Research

24 January 2012

GAIL Ltd

Result Update

Transmission volume & Growth trend

124 122 120 118 116 114 112 110 108 106 104 102 Q3 Q4 FY10 FY10 Q1 FY11 Q2 FY11 Q3 Q4 FY11 FY11 Q1 Q2 Q3 FY12 FY12 FY12 50.0 40.0 % Growth 30.0 20.0 10.0 0.0 -10.0

Transmission Tariff & Growth trend

1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 Q3 FY10 Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12 Q3 FY12 30.0 20.0 10.0 0.0 -10.0 -20.0 -30.0 % Growth

mmscmd

Volume
Source: Company, Emkay Research

% Grow th

Rs/Scm

Tranmission tariff

% Grow th

Segment wise EBIT as % of revenue

80% 60% 40% 20% 0% -20% NG Transmission Q1 FY11 LPG Transmission Q2 FY11 Petrochemicals LPG & Liquid Hydrocarbons Q1 FY12 Q2 FY12 Natural Gas Trading Q3 FY12
Rs in Bn 10 9 8 7 6 5 4 3 2 1 0

Subsidy payout as % of upstream share

12% 10% 8% 6% 4% 2% 0% Q3 FY10 Q4 FY10 Q1 FY11 Q2 FY11 Q3 FY11 Q4 FY11 Q1 FY12 Q2 FY12 Q3 FY12 (%)

Q3 FY11

Q4FY11

Subsidy Payout

As % of Upstream

Source: Company, Emkay Research

Emkay Research

24 January 2012

GAIL Ltd

Result Update

Key Financials
Income statement
Y/E Mar (Rsmn) Net Sales Growth (%) Expenditure Materials Consumed Employee Cost Other Exp EBITDA Growth (%) EBITDA margin (%) Depreciation EBIT EBIT margin (%) Other Income Interest expenses PBT Tax Effective tax rate (%) Adjusted PAT Growth (%) Net Margin (%) (Profit)/loss from JVs/Ass/MI Adjusted PAT AfterJV/ MI E/O items Reported PAT PAT after MI Growth (%) FY10A 249964 5.1 203688 166612 6212 30864 46276 14.5 18.5 5618 40658 18.6 5411 830 45778 14386 31.4 31391 12.0 12.6 0 31391 0 31391 31391 12.0 FY11E 326690 30.2 271366 241847 7527 21992 54000 16.7 16.6 6503 47497 16.4 4407 829 52400 16789 32.0 35611 13.4 10.9 0 35611 0 35611 35611 13.4 FY12E 404338 24.5 343413 308626 7716 27071 61604 14.1 15.2 7902 53702 13.8 2725 867 54882 17287 31.5 37595 5.6 9.3 0 37595 0 37595 37595 5.6 FY13E 448109 10.6 385824 351275 8111 26438 62285 1.1 13.9 9376 52909 12.8 4619 1114 56412 17883 31.7 38529 2.5 8.6 0 38529 0 38529 38529 2.5

Balance Sheet
Y/E Mar (Rsmn) Equity share capital Reserves & surplus Net worth Minority Interest Secured Loans Unsecured Loans Loan Funds Net deferred tax liability Total Liabilities Gross Block Less: Depreciation Net block Capital work in progress Investment Current Assets Inventories Sundry debtors Cash & bank balance Loans & advances Other current assets Current lia & Prov Current liabilities Provisions Net current assets Misc. exp Total Assets FY10A 12685 155305 167990 0 14460 344 14804 13896 196689 210377 91066 119311 23305 20730 137127 6317 12950 41716 76062 83 103784 54483 49301 33344 0 196690 FY11E 12685 180527 193211 0 37460 1344 38804 13896 245911 250377 97569 152808 48836 20730 142183 7602 16268 24537 92961 813 118645 64206 54439 23538 0 245911 FY12E 12685 209216 221900 0 72708 2344 75052 13896 310848 305377 105471 199906 69417 20730 172392 8336 20251 27074 115719 1013 151595 82739 68856 20797 0 310848 FY13E 12685 231211 243896 0 121665 3344 125009 13896 382800 385377 114846 270530 78614 20730 183438 13815 20369 20102 128031 1120 170508 93115 77393 12930 0 382800

Cash Flow
Y/E Mar (Rsmn) PBT (Ex-Other income) Depreciation Interest Provided Other Non-Cash items Chg in working cap Tax paid Operating Cashflow Capital expenditure Free Cash Flow Other income Investments Investing Cashflow Equity Capital Raised Loans Taken / (Repaid) Interest Paid Dividend paid (incl tax) Income from investments Others Financing Cashflow Net chg in cash Opening cash position Closing cash position FY10A 45785 5619 700 -2110 12454 15686 46761 -35702 11060 4897 -3358 -34162 0 2803 -841 -7420 0 0 -5459 7140 34575 41716 FY11E 52400 6503 829 0 -7373 16789 35570 -65531 -29961 0 0 -65531 0 24000 -829 -10389 0 0 12783 -17178 41716 24537 FY12E 54882 7902 867 0 5277 17287 51640 -75581 -23941 0 0 -75581 0 36248 -867 -8905 0 0 26477 2536 24537 27074 FY13E 56388 9376 1138 0 896 17876 49923 -89197 -39274 0 0 -89197 0 49957 -1138 -16516 0 0 32303 -6971 27074 20102

Key Ratios
Y/E Mar Profitability (%) EBITDA Margin Net Margin ROCE ROE RoIC Per Share Data (Rs) EPS CEPS BVPS DPS Valuations (x) PER P/CEPS P/BV EV / Sales EV / EBITDA Dividend Yield (%) Gearing Ratio (x) Net Debt/ Equity Net Debt/EBIDTA Working Cap Cycle (days) -0.3 -1.0 -51.4 0.0 -0.1 -45.2 0.1 0.5 -48.8 0.4 1.4 -48.0 14.9 12.6 2.8 1.7 9.1 2.0 13.1 11.1 2.4 1.4 8.6 1.9 12.4 10.3 2.1 1.2 8.1 1.6 12.1 9.7 1.9 1.2 8.9 1.6 24.7 29.2 132.4 7.5 28.1 33.2 152.3 7.0 29.6 35.9 174.9 6.0 30.4 37.8 192.3 6.0 18.5 12.6 25.1 19.9 38.0 16.6 10.9 24.1 19.7 35.3 15.2 9.3 20.0 18.1 30.5 13.9 8.6 16.6 16.5 22.8 FY10A FY11E FY12E FY13E

Emkay Research

24 January 2012

GAIL Ltd

Result Update

Recommendation History: Gas Authority of India Ltd. GAIL IN

Date 25/10/2011 28/07/2011 24/05/2011 19/01/2011 Reports GAIL Q2FY12 Result Update GAIL Q1FY12 Result Update GAIL Q4FY11 Result Update GAIL Q3FY11 Result Update Reco Accumulate Accumulate Accumulate Accumulate CMP 423 458 430 477 Target 510 510 510 565

Recent Research Reports

Date 23/01/2012 30/11/2011 14/11/2011 11/11/2011 Reports Reliance Industries Q3FY12 Result Update Oil and Gas Sector Update Gujarat State Petronet Q2FY12 Result Update IOCL Q2FY12 Result Update Buy Accumulate 98 288 120 381 Reco Accumulate CMP 792 Target 913

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24 January 2012

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