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Fertilizer plants to de-risk US HH contracts starting FY21
* During 9MFY20, GAIL’s performance was hampered by poor gas trading, petrochemicals and LPG business; however, the transmission business fared well owing to increase in implied transmission tariffs.
* The management has guided for incremental volumes of ~2mmscmd from Ramagundam, ~2.5mmscd from Matix, and ~4mmscmd from KochiMangalore pipeline from 1QFY21, and 8-9mmscmd in Jagdishpur-Haldia pipeline in FY22; which reiterates our thesis from our earlier note.
* This company guides that with start of all fertilizer plants, no US HH contract would be sold outside India.
* Trading at ~40% discount to long-term 1-year forward P/E of 14.0x, GAIL offers an excellent investment opportunity.
EBITDA miss led by poor LPG business
* GAIL reported EBITDA miss of 18% at INR20.7b (-22% YoY), led by poor LPG and liquid hydrocarbon performance, while petchem saw some marginal improvement after reporting a huge loss in 1QFY20. Depreciation was higher by 35% YoY, which was offset by higher other income (+42% YoY).
* PBT was at INR18.7b and the company paid tax at rate of 33.2% during the quarter. GAIL is still in the process of evaluating the new tax rate option. PAT came in 20% below est. at INR12.5b (-26% YoY). The company took tax write-back of INR173m, adjusting for which, PAT stood at INR12.7b.
* For 9MFY20, reported EBITDA and adj. PAT were lower by ~25% YoY at INR58.9b/INR35.8b. Higher depreciation was offset by higher other income.
Key operational highlights
* Capex for 9MFY20 stood at INR40b (3QFY20 was at INR16b), with full-year capex guidance at INR60-65b.
* So far, a total capex of INR88b (out of INR132b) has been done for Jagdishpur-Haldia-Bokaro-Dhamra pipeline and a grant of ~INR32b has been received from the government.
* GAIL had received DoT order to submit INR1.83t including penalty and interest computed on entire revenue toward Annual License Fees. The company has filed impleadment application on 23rd Jan’20 to the Supreme Court and doesn’t expect any liability for the same.
Valuation and view
* We revise down our FY21/FY22E EPS by 7%/4% adjusting for the lower LPG realizations. Also, we have lowered our capex forecast for FY20/21/22 from ~INR75b each to ~INR60b, as majority of the capex is done for JHDBPL and even the Indradhanush Gas Grid Limited (IGGL) has got Viability Gap Funding (VGF) approval of ~60% of the estimated INR92.7b pipeline cost.
* The company has declared an interim dividend of INR6.40/share (~80% payout for 9MFY20). This higher payout was one-off, however, we estimate strong dividend payout of ~35%, yielding 3.0-3.4% per share for FY21/FY22.
* We value GAIL at 8x FY21E EPS (adjusted for other income) and then add the value of investments. With a target price of INR150, we reiterate Buy.
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