GAIL (India) - 1QFY09: Petrochem still strong

GAIL reported 1QFY09 net profit of Rs8.97bn (up 31% yoy), which was 10% above our estimates, with most of the upside coming from the petrochemical operations. Petrochem EBIT was up 28% despite flat volumes, as higher absolute prices of products (driven by record oil prices) more than compensated for the rise in input gas prices. Our FY09 EPS estimate is 22% above consensus, but we remain cautious on FY10-11 due to expectations of an increase in input gas costs and a sharp decline in petrochemical prices (drop in PE less naphtha margins as well as lower oil prices).
Maintain Hold rating and Rs330 target price.

Details
GAIL’s profit growth over the past five years has been driven by the petrochemical business and this quarter was no exception. Although the petrochemical margin in terms of the polyethylene (PE) less naphtha spread was virtually flat yoy, as were GAIL’s sales volumes, absolute PE prices were up 29% yoy driven by record oil prices. Consequently, petrochemical EBIT at Rs4.4bn was up 30% yoy and may have included some inventory gains as well. We expect petrochemical profitability to remain high in FY09 on a yoy basis, though on a qoq basis it may start to decline as oil prices have started softening and we believe petrochemical margins will start declining in 2HFY09 as new capacity ramps up in the Middle East.

EBIT in the LPG and allied hydrocarbons segment at Rs3.2bn was up 60% as the upstream subsidy sharing proportion declared for FY09 (22% of gross under-recoveries) is far lower than that in FY08 (33%). This segment could also face a qoq decline in earnings if oil prices continue to remain weak.

GAIL’s core gas transmission business EBIT was Rs4.3bn (up 18% yoy). Volumes were 84.48mmscmd, up 7% yoy, and we believe most of the growth was in the newly commissioned Dahej-Uran-Dabhol pipeline. For the full year, we are forecasting volumes at 99.8mmscmd after factoring in additional gas from Reliance Industries’ KG D6 block in 2HFY09.