June 16, 2009 1

4QFY2009 Result Update

GAIL

NEUTRAL

Price Rs288

Target Price -

Investment Period -

Stock Info

Sector Oil & Gas

Market Cap (Rs cr) 36,577

Beta 0.7

52 WK High / Low 317 / 165

Avg Daily Volume 357845

Face Value (Rs) 10

BSE Sensex 14,958

Nifty 4,518

BSE Code 532155

NSE Code GAIL

Reuters Code GAIL.BO

Bloomberg Code GAIL@IN

Shareholding Pattern (%)

Promoters 57.4

MF/Banks/Indian FIs 25.6

FII/ NRIs/ OCBs 14.6 Indian Public 2.4

Abs. 3m 1yr 3yr

Sensex (%) 67.2 (2.8) 51.3

GAIL (%) 30.8 8.7 85.0

Revenues above our expectation, up 23.7%: For 4QFY2009, GAIL reported 23.7% yoy increase in Revenues to Rs6,104cr (Rs4,935cr), which was above our expectation of Rs5,919cr. Overall Revenue growth was better than expected primarily due to the good performance registered by the Natural Gas Transmission and Natural Gas Trading Segments coupled with absence of the subsidy burden during the quarter. The Natural Gas Trading and Natural Gas Transmission Segments registered Top-line growth of 43.2% and 16.9% yoy respectively, during the quarter. Revenues of the Natural Gas Trading Segment were driven by higher realisations and volume, while the Natural Gas Transmission Segment registered growth on the back of higher tariffs charged during the quarter.

OPM contracts substantially by 782bp, but above expectation: Increase in the cost of purchase of finished goods and Raw materials consumed along with higher Other Operating expenses resulted in OPM contracting by a substantial 782bp yoy to 15.7% (23.5%) as against our expectation of 13.7%. However, exemption from subsidy burden and lower Staff cost yoy helped stem the impact on OPM. Other Operating Expenditure increased 56.1% yoy to Rs605cr (Rs387cr), which included Rs126cr write-off of dry well expenditure in the E&P business. Operating Profits decreased 17.5% yoy to Rs957cr (Rs1,160cr).

Depreciation flat, Interest cost increases: Depreciation during the quarter remained flat at Rs141cr (Rs142cr), while Interest costs rose 56.5% yoy to Rs31cr (Rs20cr) on a lower base.

PAT above our expectation, declines 12.8%: Other Income spiked 118.5% yoy to Rs218cr (Rs100cr) while effective Tax rate rose to 37.0% (34.0%). Higher effective Tax rate and a substantial contraction in OPM led to PAT declining by 12.8% yoy to Rs630cr (Rs722cr), which was above our expectation of Rs587cr.

Key Financials (Standalone)

Y/E March (Rs cr) FY2008 FY2009 FY2010E FY2011E

Net Sales 18,008 23,776 27,350 31,478

% chg 12.2 32.0 15.0 15.1

Net Profit 2,601 2,804 2,970 3,248

% chg 9.0 7.8 5.9 9.4

EPS (Rs) 20.5 22.1 23.4 25.6

EBITDA Margin (%) 21.8 17.1 17.3 17.4

P/E (x) 14.1 13.0 12.3 11.3

RoE (%) 19.4 18.5 17.2 16.5

RoCE (%) 21.0 19.3 15.6 16.9

P/BV (x) 2.7 2.4 2.1 1.9

EV/ Sales (x) 1.9 1.4 1.4 1.2

EV/ EBITDA (x) 8.5 10.7 8.2 6.8 Source: Company Angel Research

Performance Highlights

Amit Vora

Tel: 022 – 4040 3800 Ext: 322 e-mail: amit.vora@angeltrade.com

Deepak Pareek

Tel: 022 – 4040 3800 Ext: 340 e-mail: deepak.pareek@angeltrade.com

June

16, 2009

Other Hig Natural G82.5mmscat Rs784/in line witremained in line with LPG TranRs1,385/totonnes (7,However, Operating Natural G77.4mmscrights for surged 27volumes b(Rs2,769crelatively lto 1.5% (2 Exhibit 1:

Source: Com Petrochemtonnes) durealisationincrease Revenuesto 54.2% ( LPG and tonnes (2increased in the LPGLPG priceRs767cr (positive Ereported nPositive Oreported L

Petro Chemicals,

679

LPG & Other Liquid

Hydrocarbons,767

ghlights

Gas Transmcmd (82.2m‘000scm (Rsth the growflat yoy at 85

h the growth

nsmission: Lonne (Rs1,383,000 tonnOPM expaProfit declin

Gas Tradincmd (68.8mmthe entire P

7.4% yoy to boosted Revcr). Natural Gow Margins.

2.6%) resultin

Segment-w

mpany, Angel Re

micals: Petruring the qu

ns dipping 1in volumes of the Segm

(53.4%), whe

other Liqui,50,000 tonn13.7% yoy t

G and otheres globally, le(Rs791cr). EBITDA Margnegative EBOPM restrictLoss at the O

GAILTEL, 5

Revenues (

mission: Natmmscmd), ws674/’000scm

wth in Realis5.7% (85.9%in Realisatio

LPG Transm367/tonne), es) resulting

anded by 42ing by 2.4%

ng: Gas tramscmd) duriPMT output d

Rs5,693/‘00venues of thGas Trading OPM of the

ng in Operati

wise Perform

esearch

rochemical vuarter, while

2.4% yoy tand lower

ment to Rs67ereas Operat

id Hydrocarnes) during to 83,000 to

r Liquid Hyded to a marg

Exemption frogin at 32.1%BITDA Margited the dec

Operating leve

TraSer

Unallocated, 6

Net of Excise)

tural Gas Trwhereas ream). Thus, Nsations, at R

%), which led ons, to Rs499

ission realisawhereas vo

g in a 7.5% y25bp yoy toyoy to Rs81

ading volumng the quartduring the fi00scm (Rs4he Segment g is a high Re Segment, dng Profit dec

mance

volumes gresoft interna

to Rs59,561realisations

79cr (Rs741cting Profit de

rbons: LPGthe quarter,

onnes (73,00rocarbons Sginal 3.0% yom the Sub

% (47.2%), unin of 67.9%

cline in Opeel), which fel

NG ansmission rvices, 582

LPG Transmission Services, 99

Natural Gas Trading, 3,966

ransmission alisations wet Revenues

Rs582cr (Rsto Operating

9cr (Rs428cr

ations increaolumes decryoy decreaseo 81.8% (77cr (Rs83cr).

mes jumped ter on the biscal. Averag,471/‘000scmby a whop

Revenue geduring the quclining by15.

ew 4.6% yoytional petroc/tonne (Rs6

s resulted incr). OPM expeclined 7.1%

volumes in, while othe

00 tonnes). HSegment by yoy fall in thebsidy burdennlike in the l

% because oerating Profitll by 34.0% y

Petro Chemicals,

368

LPG & Other Liquid

Hydrocarbon, 246

GAILTEL, 0

volumes rewere highers of the Seg

s498cr). OPMg Profits growr).

ased marginareased 8.7%e in Revenue7.6%). Lowe

a significaback of receige realisatiom), which topping 43.2%enerator Seguarter, decre3% yoy to R

y to 1,14,00chemical pric67,982/tonnen 8.4% yoypanded margyoy to Rs36

creased 4.4r Liquid Hyd

However, dec9.0% yoy oe Revenues led to the ast quarter w

of the highet (in 3QFY2yoy to Rs246

Unallocate(79)

Operating

Oil

mained flat r by 16.3%gment grew M of the Sewing by 16.6

ally by 1.3%% yoy to 7,es of the Seer volumes

ant 12.5% iving the ma

ons on tradinogether with yoy to Rs3

gment, but itased by 106s61cr (Rs72

0 tonnes (1ces led to a

e). Overall, my decrease ginally by 76

68cr (Rs396c

% yoy to 2,drocarbon vocline in realin account oof the SegmSegment rewhen the Se

er Subsidy b2009 the Se6cr (Rs373cr)

NGTransmServices

T

Natural Gas Trading, 61

ed,

g Profit

2

l & Gas

GAIL

yoy at % yoy

16.9% egment 6% yoy,

% yoy to ,15,000 egment.

led to

yoy to arketing ng also

higher 3,966cr t earns

6bp yoy cr).

09,000 average modest in the

6bp yoy cr).

,61,000 olumes sations

of lower ment to eporting egment burden. egment ).

G ission s, 499

LPG Transmission Services, 81

June 16, 2009 3

Oil & Gas

GAIL

Outlook and Valuation

GAIL reported good set of numbers for 4QFY2009, which was higher than our estimates both on the Top-line as well as Bottom-line front. GAIL has set a target of transmitting 94.8mmscmd of natural gas from domestic sources and through LNG route during FY2009-10 under the Annual Memorandum of Understanding signed with the Ministry of Petroleum and Natural Gas (MoPNG) for performance targets for FY2009-10. This represents decent growth over FY2009 transmission volumes. However, overall, performance of the Segment is likely to be under pressure going ahead on account of downward revision in the transmission tariffs. GAIL’s extant transmission network, viz. HBJ and DVPL pipelines are depreciated whereas the newer regulations call for tariff determination on the basis of Net Block (Gross block – Depreciation). Though growth in the Natural Gas Trading Segment is likely to result in marginal improvement in profitability going ahead, we believe that the overall performance would be muted going ahead. Also, the rising crude oil prices pose a threat of higher subsidy burden in the coming year. At the CMP of Rs288, the stock is available at 11.3x FY2011E EPS of Rs25.6 and 1.9x FY2011E P/BV. We maintain a Neutral on the stock. Exhibit 2: 4QFY2009 Performance Y/E March (Rs cr) 4QFY2009 4QFY2008 %chg FY2009 FY2008 %chg Net Sales 6,104 4,935 23.7 23,776 18,008 32.0 COGS 4,493 3,168 41.8 17,204 11,886 44.7 Total operating exp 5,147 3,775 36.3 19,722 14,059 40.3 EBITDA 957 1,160 (17.5) 4,054 3,949 2.7 EBITDA Margin (%) 15.7 23.5 17.1 21.9 Other Income 218 100 118.5 797 556 43.2 Depreciation 141 142 (1.0) 560 571 (1.9) Interest 31 20 56.5 87 80 9.3 PBT 1,004 1,098 (8.6) 4,204 3,855 9.1 PBT Margin (%) 16.4 22.2 17.7 21.4 Total Tax 374 375 (0.4) 1,400 1,254 11.7 % of PBT 37.2 34.2 33.3 32.5 PAT 630 722 (12.8) 2,804 2,601 7.8 Exceptional items 0 0 0 0 Adj. PAT 630 722 (12.8) 2,804 2,601 7.8 PAT Margin (%) 10.3 14.6 11.8 14.4 Source: Company, Angel Research

June 16, 2009 4

Oil & Gas

GAIL

Exhibit 3: 4QFY2009 Segment-wise Performance

Y/E March (Rs cr) 4QFY2009 4QFY2008 %chg FY2009 FY2008 %chg Natural gas Trading 4,743 3,382 40.2 18,308 12,648 44.7 Petrochemicals 681 748 (8.9) 2,731 2,587 5.6 LPG & Liquid hydrocarbons 767 791 (3.0) 2,964 2,641 12.2 Transmission - NG 651 556 17.1 2,482 2,248 10.4 Transmission - LPG 99 108 (8.2) 380 383 (0.6) Gailtel 5 7 (31.9) 24 28 (13.7) Unallocated 6 21 (70.7) 52 30 74.4 Total 6,953 5,614 23.9 26,942 20,565 31.0 Less: Intersegmental 849 678 25.1 3,166 2,556 23.9 Sales 6,104 4,935 23.7 23,776 18,008 32.0 EBIT Natural gas Trading 59 72 (17.3) 348 204 70.5 %EBIT 1.2 2.1 1.9 1.6 Petrochemicals 328 335 (2.3) 1,210 1,215 (0.4) %EBIT 48.1 44.9 44.3 47.0 LPG & Liquid hydrocarbons 224 332 (32.5) 859 871 (1.4) %EBIT 29.2 42.0 29.0 33.0 Transmission - NG 434 316 37.4 1,598 1,478 8.1 %EBIT 66.7 56.8 64.4 65.8 Transmission - LPG 64 60 6.9 221 218 1.4 %EBIT 64.4 55.3 58.1 57.0 Gailtel (2) (1) 83.7 (5) 1 (521.3) %EBIT (34.4) (12.8) (18.7) 3.8 Unallocated (165) (24) 579.2 (339) (340) (0.4) %EBIT (2,626.9) (113.3) (652.7) (1,142.8) Total EBIT 942 1,090 (13.5) 3,893 3,648 6.7 %EBIT 15.4 22.1 16.4 20.3 Less: Interest 31 20 56.5 87 80 9.3 Less: Unallocable exp (92) (28) (398) (287) Profit before tax 1,004 1,098 (8.6) 4,204 3,855 9.1

Source: Company, Angel Research

June 16, 2009 5

Oil & Gas

GAIL

Research Team: Tel: 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com

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