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Q2 hit by plunge in cyclical business EBITDA
GAIL India (GAIL)’s consolidated and standalone Q2FY20 recurring EPS was down 28-39% YoY due to sharp decline in EBITDA from its cyclical businesses. Its gas marketing EBITDA, hit by low spot LNG prices, is the lowest in seven quarters since US LNG imports began. Petrochemical volumes were up sharply on utilisation exceeding rated capacity while gas transmission volume was up modestly. We have cut our petrochemical, LPG and gas marketing EBITDA estimates sharply for FY20E and more modestly for FY21E leading to cut in FY20- FY21E EPS estimates by 16-7% and target price by 6% to Rs144 (14% upside). We retain ADD on GAIL. However, absence of any positive triggers and any further disappointment in gas marketing and petrochemicals may cap share price.
* Q2FY20 consolidated recurring EPS down 28% YoY on plunge in cyclical business EBITDA: Q2FY20 standalone recurring EPS is down 39% YoY hit by fall in LPG, gas marketing and petrochemical EBITDA by 65%, 76% and 88% YoY, respectively. Share of profit from associates and JVs being up 51% YoY at Rs3.2bn meant consolidated EPS fall was more modest at 28% YoY. Gas marketing volumes were down 1.6% YoY at 94.7mmscmd while gas transmission and petrochemical volumes were up 1-19% YoY. H1 consolidated and standalone recurring EPS was down 14-23%, respectively, hit by cyclical business EBITDA decline like in Q2.
* Takeaway from earnings call:
1) GAIL’s Q2 gas marketing EBITDA was hit by delay in start and unscheduled shut down of some fertiliser plants and the LNG, which was to be supplied to these plants, being sold to other consumers at a loss due to prevailing low spot LNG prices;
2) take or pay is not applicable for plants that were not commissioned and may not even apply to plants with unscheduled shutdowns if they make up for volumes not consumed in Q2 later in the year;
3) of the two fertiliser plants with delayed start up, one is expected to start operations in 3- 4 months and the other in 6-7 months;
4) GAIL management has indicated that gas marketing EBITDA in Q3-Q4FY20E is likely to be higher than Rs2.54bn in Q2FY20;
5) one-time refund of Rs1.9bn was made to consumers in Q2 relating to fixed monthly transmission charges charged to them in earlier years but not allowed in the final tariff order by the regulator PNGRB;
6) Kochi-Mangalore gas pipeline is estimated to complete in Dec’19 and start operations in CY20 and
7) capex was Rs42bn in H1FY20 and is estimated at Rs70bn each in FY20 and FY21.
* Cut FY20-FY21E EPS and target price; retain ADD: We have cut our cyclical business EBITDA estimates for FY20 steeply and that for FY21 more modestly to factor in the performance in H1FY20 and likely outlook. This has led to a cut in our FY20E EPS estimates by 16%, FY21 EPS estimate by 7% and target price by 6% to Rs144 (14% upside). Spot LNG prices remaining low in H2FY20-FY21E, which some expect, may mean further downside to our gas marketing EBITDA estimates.
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