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Raghuvir Srinivasan

Piped profits.

SHAREHOLDERS in Gail can continue to hold the stock. Fresh investment can be contemplated once the government policy on gas pricing clears up; that could open up better vistas for the company and its stock.

Q4 gusher: It has been a bumper final quarter for Gail India. Profitability, at both the operating and net levels, has seen a sharp upsurge. While the operating profit is up by a big 52 per cent to Rs 990.5 crore, the net profit has shot up by a whopping 65 per cent to Rs 531 crore in the quarter ended March 2003. The rise in profitability has come even as turnover at the net level has shown just an 11 per cent growth.

Operating efficiencies have obviously been better, going by the operating margin of 29.3 per cent for the quarter compared to 22.5 per cent in the same period last year. Of course, there has been some help from `other income' which more than doubled to Rs 123.5 crore but the net was also boosted by a sharp 27 per cent drop in interest cost to Rs 37.3 crore.

The story is much the same for the performance in the whole of 2002-03 as well. While net sales have grown just 8 per cent, operating profit is up 29 per cent and post-tax profits by an impressive 37 per cent to Rs 1,607 crore. Operating margin during the year is higher at 26.7 per cent against 22.7 per cent in 2001-02.

The stable operations in the petrochemical business have obviously been a significant factor in the higher profitability levels registered by Gail. By the company's own reckoning, petrochemical margins were good; volumes in the business shot up 15 per cent to 2.90 lakh tonnes during 2002-03, which is about 96 per cent capacity of its 3 lakh tonne gas cracker. Besides, the profitability in the LPG business also appears to have been good given the rising global prices of crude oil, especially in the fourth quarter. Gail, which has about 13 per cent of total LPG market share, supplies to the marketing companies at market prices.

Awaiting free pricing: The important event to wait for now is the freeing of gas pricing. Gail could see a significant rise in its profitability levels once the government allows the market to determine prices of natural gas. At present gas prices are capped at Rs 2,850 per million metric standard cubic metre while market prices are double that.

Gail is meanwhile on an ambitious expansion programme. To consolidate its pre-eminent position in gas transmission in India, Gail is planning a national gas grid that would connect major producing/landfall centres with other parts of the country at an investment of a whopping Rs 20,000 crore. Spring in petrochem: The petrochemicals business is beginning to gradually come into its own; capacity of the gas cracker, which provides the ethylene feedstock for downstream units, is being increased by almost 50 per cent to 4.40 lakh tonnes. Simultaneously, the downstream polyethylene capacity is also being pushed up in what is a clear indication that the petrochemicals business has not just stabilised but is growing too. The recent marketing pact signed with Haldia Petrochemicals will provide Gail a crucial missing element in its product mix — polypropylene, the fastest growing polymer — even as it helps expand its marketing reach to the eastern and north-eastern regions. The swap of polyethylene products will also expand the base in terms of product grades for both players to mutual benefit.

Volatility in telecom: In the telecom space, Gail is selling bandwidth on its optical fibre cable backbone to national long-distance and cellular operators. The company is now concentrating on expanding its network reach into the South and the North-West even as it increases capacity on the Delhi-Mumbai route. Telecom, though a good stream of revenues for the moment, may not occupy prime space in the future revenue and earnings scheme as national long distance is fast acquiring the character of a commodity business where rates are subject to volatile fluctuations.

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