Gail’s surprisingly good trading segment performance boosts Q2 profits

Graphic: Ajay Negi/Mint

Graphic: Ajay Negi/Mint

Gail (India) Ltd’s September quarter profit surpassed analysts’ estimates by a wide margin. The gas transmission company’s net profit came in at ₹1,963 crore, almost 50% more than a year ago. The consensus profit estimate of analysts surveyed by Bloomberg was ₹1,518 crore.

There are some one-offs (₹210 crore staff costs, ₹100 crore in transmission revenue, ₹130 crore in trading) which broadly offset each other, with operating performance solid for most segments, analysts from Jefferies India Pvt. Ltd wrote in a 5 November report.

For the half year ended 30 September, net profit increased robustly by 38% from a year earlier, driven by good growth across businesses and a better operating environment.

Gail’s trading business performance was a positive surprise and helped its overall profitability meaningfully during the quarter.

The trading segment’s earnings before interest and tax (Ebit) increased to ₹1,045 crore from ₹420 crore in the year ago period. Gail appears to have captured a substantial portion of the $2.35 per million British thermal unit spread in the US & Asian spot LNG prices, according to analysts from Jefferies. “Yet, this may be hard to repeat,” added the brokerage.

Performance of the LPG and liquid hydrocarbons business was decent as well. On a year-on-year basis, Gail’s petrochemicals (petchem) business did not disappoint. The company reported a 89% increase in the segment’s Ebit. Higher sales volume helped.

However, profits are lower compared to the June quarter. Separately, it came as a slight disappointment that gas transmission volume was lower than expectations at 106 million metric standard cubic metres per day.

Nonetheless, better performance in other segments helped compensate transmission segment’s below-expected volume numbers to some extent.

IDFC Securities Ltd believes the momentum will be sustained over the second half of the year as well, with gradual growth in gas/petchem volumes, margin improvement in petchem and transmission and sustenance of earnings in the LPG and liquid hydrocarbons segment.

This should propel a compounded annual growth rate of 27% in earnings per share over FY18-20E, with return on equity/return on capital employed expected to improve 390 basis points over the period, reckons IDFC Securities. One basis point is one hundredth of a percentage point.

What of the stock?

So far this fiscal year, Gail India’s shares have appreciated 14%. Currently, the stock trades at 13.6 times estimated earnings for this financial year, based on Bloomberg data. That’s not too pricey. What’s more, the earnings outlook is bright.

First Published: Fri, Nov 09 2018. 08 30 AM IST

Source: livemint