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Huge miss on petchem and LPG/Liq. HC; concerns on US LNG contracts
* 4QFY19 EBITDA of INR16.8b was lower (-40% est., -1% YoY, -37% QoQ) due to poor performance in petchem & LPG/liq HC segments. Adj. for impairment of INR3.2b, PAT came in at INR14.4b (-19% est., +43% YoY, - 16% QoQ). Impairment was on account of the Dabhol LNG terminal (~INR1.7b) and GAIL Gas Global (~INR1.5b).
* Reported PAT came in at INR11.2b (-37% est., +10% YoY, -33% QoQ), despite higher other income at INR8.7b (v/s INR2.8b in 4QFY18 and INR2.2b in 3QFY19). Depreciation was higher at INR4.6b (+27% YoY, +26% QoQ).
* For FY19, EBITDA was up ~25% YoY at INR95.3b with reported PAT at INR60.3b (+30% YoY).
* Gas transmission volume was in line with estimate at 109mmscmd (+3% YoY, +1% QoQ). For FY19, transmission volumes were at 107mmscmd (+2% YoY).
* Petchem sales were at 213mmt (+12% YoY, +23% QoQ), though higher cost and lower realization at INR81/kg (-6% YoY, -13% QoQ) resulted in lower EBITDA. Petchem sales stood at 735mmt (+9% YoY) in FY19.
Valuation and view
* GAIL is trading at 11.5x FY20 EPS of INR30.3 and 6.8x FY20 EV/EBITDA. We have used 9x 1-year forward P/E to value GAIL due to concerns on its US LNG contracts.
* Management has guided that fertilizer plants on Jagdishpur-Haldia pipeline would commence operations by 2021, which would further decrease concerns on sale of US LNG. But, we expect significant delays in commencement of operations of the fertilizer plants.
* Additionally, petrochemical margins & LPG realizations are expected to be under stress due to excess supply. Furthermore, PATA continues to witness operational problems.
* We continue to value the stock at 9x FY21 EPS while adding contribution from the investment to arrive at a target price of INR350. Maintain Neutral.
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