>GAIL (MORGAN STANLEY)

F4Q09 Results: Back on Track

What’s New: GAIL reported an adjusted EBITDA of Rs8.7bn and an adjusted profit of Rs4.9bn for F4Q09. The company had a write back of Rs2.2bn of staff cost in F4Q09, due to excess provision in F3Q09. We believe the company, after a dismal F3Q09, is back on track to meet our F2010 estimates. The key positive surprise in the results was: a) better-than-expected petrochemical
business; and b) Improved margins of the LPG transmission division. However, margins for the gas
transmission division disappointed due to appreciation of the dollar against the rupee. We believe that with the recent dollar weakness and increase in gas transmission volumes from KGD6, GAIL is poised to meet our F2010 estimates for the division.

Improvement in Petrochemical division: Sales volumes grew 4.6% YoY but were down 13% QoQ. GAIL continued to clear its polymer inventory as domestic demand and price realizations improved on a QoQ basis. Price realizations improved by 22% on a QoQ basis, but fell 13% YoY. This led to EBITDA growth of 184% sequentially and almost doubling of its net realizations for the division (EBIT/tonne) on a QoQ basis. We believe that with improving demand for polymers, GAIL should meet our F2010 estimates for the division.

LPG transmission showed a 32% growth in margins on a QoQ basis despite a 6% QoQ drop in volumes. We believe that the increase in margins was due to lower operating costs; however, we need to clarify this with management.

Gas transmission volumes for the quarter increased by 0.5% YoY to 82.5mmscmd. Transmission tariffs for the quarter at Rs877/tscm were up 12.5% YoY. Gas sales were up 12.5% YoY but down 3% QoQ due to shutdown in Panna Mukta Tapti (PMT) gas fields. EBITDA for the division increased 3% QoQ, but dropped 14% YoY due to 25% appreciation of the dollar against the rupee, causing an increase in fuel costs for the division.

To see full report: GAIL