GAIL (India) Equity Research

Date of Research – 27 January 2016

Price – Rs. 359.85

About the Company

Incorporated in August 1984, GAIL (India) Limited (“GAIL” or the “Company”) is engaged in the exploration, production,distribution, and marketing of natural gas in India and internationally.

Over the years, GAIL has grown organically by building large network of natural gas pipelines covering over 9,500 km with a capacity of around 172 MMSCMD (Million Metric Standard Cubic Meter Per Day) of natural gas; two LPG pipelines covering 2,040 km with a capacity of 3.3 MMTPA (Million Metric Tonne Per Annum) of LPG; seven gas processing plants for production of LPG and other liquid hydrocarbons, with a production capacity of 1.4 MMTPA.

The Company owns a 70% equity share in Brahmaputra Cracker and Polymer Limited (BCPL) which is setting up a polymer plant in Assam with a capacity of 280,000 Tonnes Per Annum.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015 FY 2016FY 2017
Total Income from Operations51,094.4361,918.3160,703.96 54,887.66 49,333.81 
Expenses43,609.8753,913.8655,053.48  49,792.74  42,739.62  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)7,484.568,004.455,650.48  5,094.92  6,594.19  
Depreciation1,318.681,644.221,432.57  1,850.90  1,543.01  
Finance Costs437.31668.71651.83  980.91  510.99  
Other income829.28918.21863.42  829.13  1,006.46  
Exceptional items(312.69)(62.86) – (210.65) 
PBT6,557.856,922.424,492.36  3,092.24  5,757.30  
Tax2,241.182,194.831,420.92  1,044.101,809.36  
PAT (before Minority Interest and share of Associates)4,316.674,727.593,071.44  2,048.14  3,947.94  
Profit/ (loss) attributable to Minority Interest(6.27)0.26(0.49) (95.14) – 
Share of profit / (loss) of Associates(50.66)(58.89)(88.12) (108.34) 574.02  
Consolidated Profit / (Loss) for the year4,373.604,786.223,160.05  2,251.62  3,373.92  

Profitability Analysis

Consolidated(%)
ParticularsFY 2013FY 2014FY 2015 FY 2016FY 2017
Operating Profit Margin Ratio14.6512.939.31 9.28 13.37 
Net Profit Margin Ratio8.457.645.06 3.73 8.00 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Share Capital1,268.481,268.481,268.481,268.48 1,268.48 
Reserves & Surplus23,644.7027,526.1831,188.4732,754.19 34,127.76 
Net worth (shareholders funds)24,913.1828,794.6632,456.9534,022.67 35,396.24 
Minority Interest981.991,456.621,758.781,758.30 1,663.16 
Long term borrowings9,340.9615,501.0616,060.8514,752.38 12,669.87 
Current liabilities13,230.2312,008.5412,520.4812,712.45 14,971.59 
Other long term liabilities and provisions702.742,025.671,314.522,851.76 1,968.20 
Deferred Tax Liabilities1,864.992,730.353,547.69 4,320.83 
Total Liabilities51,034.0959,786.5566,841.9369,645.25 70,989.89 

 

Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Fixed Assets34,665.3642,679.4846,269.2647,655.98 50,964.12 
Noncurrent Investments1,144.751,253.521,039.181,132.89 1,223.13 
Current assets11,955.367,729.6314,152.3812,363.63 12,835.59 
Long term advances and other noncurrent assets3,268.628,123.925,381.118,366.50 5,840.80 
Total assets51,034.0959,786.5566,841.9369,645.25 70,989.89 

Efficiency Analysis

 
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
ROCE20.6615.7915.9211.18 10.25 
ROE / RONW17.8415.1814.759.03 5.79 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
ParticularsFY 2013FY 2014FY 2015 FY 2016FY 2017
Total Income from Operations (Rs. Cr.)51,094.4361,918.3160,703.96 54,887.66 49,333.81 
Growth (%)15.64 %21.18 %(1.96 %)(9.58 %) (10.12 %) 
PAT (Rs. Cr.)4,316.674,727.593,071.44  2,048.14  3,947.94  
Growth (%)(1.91 %)9.52 %(35.03 %) (33.32 %) 92.76 % 
Earnings Per Share – Basic (Rs. )34.4837.7324.91 17.75 19.91 
Earning Per Share – Diluted (Rs. )34.4837.73

24.91 

17.75 19.91 
Price to Earnings9.269.8514.9921.04 18.75 

Dividend History

The Company has maintained an average dividend yield of 2.35 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. GAIL’s average current ratio over the last 5 financial years has been 0.75 times.

Long term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

GAIL’s average long term debt to equity ratio over the last 5 financial years has been 0.31 times which indicates that the Company operates with a low level of debt and is well placed to pay for its obligations.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

GAIL’s average interest coverage ratio over the last 5 financial years has been 17.94 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, GAIL reported a promoter holding of 54.97 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 40.25 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.