Published on 17/10/2020 11:50:53 AM | Source: Emkay Global Financial Services Ltd

Buy GAIL Ltd For Target Rs.130 - Emkay Global

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Gas marketing loss dents Q1; volumes nearing full recovery

* GAIL reported Q1FY21 standalone EBITDA/PAT of Rs6.23/2.56bn, missing estimates by 52%/62% on gas marketing EBIT loss of Rs5.5bn. Petchem loss of Rs1.5bn was better due to high sales volume and low gas cost. LPG -LHC was a 28% miss on lower volumes.  Gas transmission EBITDA fell 18% qoq to Rs9.5bn as volumes were down 17% to 90.2mmscmd. Marketing volumes also declined 17% qoq to 81.2mmscmd with RLNG portfolio margin at negative USD0.44/mmbtu. Petchem and LPG-LHC opex was higher.

* Management said that Q1 was an exceptional quarter with low volumes and prices, particularly for the marketing segment, which also had Rs2.5bn of inventory loss. Gas volumes and petchem utilization are near normal now and recovery in oil prices gave respite.

* We cut our FY21/22/23E EPS by 7%/3%/5%, building in lower gas margins now, partially offset by reduction in interest cost. We cut TP by 4% to Rs130, valuing the core business at 5.5x blended EV/EBITDA. We maintain Buy on GAIL and EW stance in EAP.


Key highlights: GAIL’s reported segmental EBITDA was supported by higher Other Income allocated, with gas transmission broadly in line while LPG transmission being a miss. Other segment’s earnings were also higher. GAIL’s blended gas marketing margin was negative USD0.2/mmbtu. Petchem realization premium to Korea benchmark improved from 13% to 14% qoq. Pata production fell 36% qoq (1% yoy) to 134kt with 66% capacity utilization, though sales were much higher at 183kt. Implied opex jumped significantly. LHC volumes fell sharply by ~50% from the normal rate due to the lockdown in Q1. LPG-LHC realization was at a 2% premium to Arab Gulf vs. a ~5% discount in FY20. Opex was higher than estimates in this segment also. Depreciation fell 9% qoq, while interest cost jumped 50% to Rs495mn. Other Income was also higher than our estimate, up 60% yoy/down 53% qoq. The tax rate was higher at 28.3%. Overall, GAIL saw a 70-80% earnings decline yoy. Q1 capex was Rs4.0bn.


Management guidance: Volumes are now back to over 95% of normal with transmission /marketing at 109.5/97mmscmd. Covid-19 has led to delays in new fertilizer plant connectivity. Matix is almost ready, while MCF is pending connectivity and RFCL under pre commissioning. The situation would improve in Q3FY21. LNG marketing earnings were impacted by lower crude/spot prices coupled with demand destruction and stress sales due to Covid-19. GAIL invoked force majeure. 10mmscmd of LNG volumes is international, which saw a loss. Inventory loss may be reversed. Petchem demand and pricing are better now. Capex guidance is Rs50-60/90bn in FY21/22, mainly on pipelines and petchem. Urja Ganga will be completed by the next year and GAIL expects 10mmscmd volume in the first full year of operation from fertilizer plants. It is expecting unified tariffs to come in 2-3 months as the process is underway with PNGRB.


Valuation: We value GAIL on the SoTP basis using FY22E EV/EBITDA for the core business and investments at a 30% holdco discount. Key risks are adverse commodity prices-margins and currency, policy-regulatory issues, bifurcation uncertainty, Covid-19 delays and outages.


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