OREANDA-NEWS. July 29, 2011. Gail's steady growth resumed in the June '11 quarter, after the blip of March '11 quarter, which was affected by a jump in subsidy burden. Its volume growth stagnated while profit growth came mainly from lower subsidy burden and higher margins in gas transmission. It completed a major work on the Dahej-Vijaypur II pipeline. However, sourcing additional gas will be a key challenge, as its additional infrastructure comes into play.

Only its natural gas trading segment for Gail pulled its numbers up, a visible trend for the past few quarters. The segment, which represents nearly 80% of Gail's revenues, posted a strong 32.2% growth even as volumes slipped 2.6% to 82.63 mmscmd. A strong 140-bp margin expansion to 4.3% nearly doubled segment's profit to 313.1 crore.

The LPG and liquid hydrocarbons business turned in a decent profit of 228.5 crore. This was 2% below the year-ago period. But it is better than 73-crore loss in the March '11 quarter.

Gail had to contribute 682 crore towards oil retailers' under-recoveries in the June '11 quarter, which were 53% higher against the year-ago period. Still, they were nearly 25% lower to the March '11 quarter, though under-recoveries had increased in the June '11 quarter. This proved vital in its profit growth to its highest level in almost three years.

The scrip trades at 15.9 times its earnings for trailing 12 months. The company's valuations are at a substantial discount to smaller players. But it faces challenges in continuing with its volume growth, particularly when domestic availability of natural gas is not improving.