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Weak performance across segments; maintain ADD 

GAIL posted EBITDA of Rs17.6bn (? 49% YoY & ? 60% QoQ), 22% below our estimates on  account  of  lower  gas  trading  margins  of  US$0.14/mmbtu  vs.  our  estimates  of US$0.54 /mmbtu and higher than expected losses in petrochemical. EBITDA declined  mainly due to weak performance across segments. The quarter is marked with: (1) NG transmission volume impacted due to loss of LNG supply (8.6mmscmd) from Gazprom;  (2) sharp decline in gas trading margins; (3) petrochemical posted EBITDA loss; & (4)  Lower LPG price realization due to fall in crude price and higher input gas cost (APM price  hike  YoY).  Considering  the  volatility  in  gas  trading  segment  &  no  near  term  solution  of  cheaper  gas  supply  as  feedstock  for  petrochemical,  we  cut  our  FY23E EBITDA/PAT by 4.7%/5.1% and maintained FY24E & FY25E. We believe, new fertiliser  plants & CGD’s lined up on Urja?Ganga pipeline would be the major growth driver of GAIL’s gas  transmission &  trading segment. We maintain our ADD recommendation with a SoTP Target Price of Rs95.

Weak performance across segments 

NG Transmission: Volume declined 6% YoY & 2% QoQ to 107.7mmscmd, impacted due  to loss of LNG supply from Gazprom and higher spot LNG prices. EBITDA declined 23% YoY & 7% QoQ to Rs10.1bn on account of higher cost of input gas for gas compressors  (Govt. has cut APM gas supply to GAIL by 0.5 mmscmd). NG Trading: Volume declined  5% YoY & 8% QoQ to 92.5mmscmd. Sharp decline in gas trading margins led to  fall in trading  EBITDA  to  Rs4.5bn  (?60%  YoY  &  ?81%  QoQ).  LPG  &  OLHC:  Price  realization  declined by 9% QoQ due to crude prices cooled off from high. EBITDA declined by 25% YoY  and  21%  QoQ  to  Rs5.2bn  mainly  due  to  sharp  rise  in  input  gas  cost  YoY  basis. Petrochemical:  Sharp  decline  in  petrochemical  volume  (down  56%  YoY)  due  non? availability of cheaper/contracted LNG  for  the production of petrochemical. Reported EBITDA loss of Rs2.1bn (?144% YoY & ?224% QoQ). Net profit: PAT of Rs15.4 (?46% YoY  & ?47% QoQ) which is 7% below our estimates. Rise in other income has supported profit.

Rising gas demand a boost to GAIL’s transmission 

GAIL  would  be  the  biggest  beneficiary  of  rising  gas  demand  in  India. We  expect India’s gas demand  to  register a CAGR of 6% over  the next  three years, primarily driven by CGDs, fertilizers and refineries. GAIL has been expanding pipeline network (JHBDPL fully ready by Dec’22) with 9,000km to be ready in next five years. GAIL’s earnings are sensitive to changes in the pipeline tariffs; Rs2/mmbtu change in the pipeline tariff leads to ~3% swing in FY24E PAT. GAIL will be the beneficiary if Govt. caps on APM gas price, GAIL consume APM gas for LPG production and input for gas compressors (NG transmission).

Maintain “ADD” 

Over period of next 3 years PAT would be supported by transmission volumes CAGR of 3%. At CMP, the stock trades at 6,2x of FY25E EBITDA, which is at discount to its long?term average of 7.0x  (over  the last  5 years) and offering attractive dividend  yield 7%/8% in FY24E/FY25E. Thus, we maintain ADD recommendation with a SoTP based Target Price of Rs95. 

Valuations

GAIL’s earnings growth is likely take small hit, due to higher base effect and volatility in the commodity portfolio. Over period of next 3 years PAT would be supported by transmission volumes CAGR of 3%. At CMP, the stock trades at 6,2x of FY24E EBITDA, which is at discount to its long?term average  of  7.4x  (over  the  last  5  years).  We  maintain  ADD recommendation with a SoTP based Target Price of Rs95

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