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Buy GAIL (India) Ltd For Target Rs. 250

Upcoming fertilizers plants to drive gas sales

Result Highlights‐ 1Q earnings miss estimates

* 1QFY22 Profitability: Operating Profit and PAT stood at Rs 24.1bn (+287% YoY; ‐6% QoQ) and Rs 15.3bn (+497% YoY; ‐20% QoQ). Strong YoY growth stemmed from base effect as 1QFY21 was severely impacted by Covid‐1st wave. The sequential decline in earnings however stemmed from a) QoQ weaker Petchem sales on backs of maintenance shutdown and b) impact of Covid‐2nd wave on NG transmission.  

* NG Transmission: Gas transmission volume stood QoQ weaker at 107.7mmscmd (4Q: 109.8mmscmd), as Covid‐2nd wave impacted third party shipper volumes. However, prognosis appears strong, as 4 fertilizers with combined gas consumption potential of 10‐12mmnscmd are very close to commissioning in 2HFY22.  

* NG Trading: NG trading volume stood QoQ higher at 95.5mmscmd (4Q: 91.1mmscmd). GAIL imported 23 US cargoes during the quarter, of which 15 were sold in overseas market and 8 were brought in India. High spot LNG prices bode well for GAIL’s US LNG import and NG trading margins improved to USD 0.17/mmbtu (4Q: USD 0.13/mmbtu). Margins are expected to stay firm going ahead.

* Petrochemicals: Petchem, sales stood QoQ lower at 138TMT (4Q: 234 TMT) with profitability at Rs 1.4bn (‐190% YoY; ‐77% QoQ) also weaker, as GAIL undertook maintenance shutdown at its PATA petrochemical plant. However, for rest of FY22, GAIL plans to run the plant at more than 100% utilization, covering up for loss of production in 1Q. PE prices firmed up during the quarter by 4% QoQ to Rs 99/kg, offsetting the impact of low production to some extent.  

* LPG‐LHC: Segment profitability at Rs 6.3bn, improved 34% QoQ, despite 3% QoQ lower sales volume at 250TMT, on account of stronger LPG realizations. 

View & Valuation

The 1QFY21 earnings were adversely impacted by impact of Covid‐2nd wave and planned maintenance under‐taken by GAIL at its PATA petrochemical plant, impacting production and sales of petrochemicals. However, going ahead earnings are expected to improve across segments as a) commissioning of four fertilizers plants on GAIL’s network between Aug’21 and May’22 is likely to boost volume by 10‐12mmscmd, b) Petrochemical production and sales would be restored to normalized levels post maintenance; GAIL expects to achieve 100% utilization on annualized basis and c) the profitability in the gas trading segment is expected to remain healthy as new fertilizer help consumer imported US LNG cargoes.  

In the longer run, a strong prognosis (7% CAGR over 2020‐30) for consumption of natural gas in India, driven by CGD, Fertilizer and Industrial sectors is likely to have positive implications for GAIL. We maintain our BUY rating on GAIL with a Mar’23 TP of Rs 250/sh. Our TP implies a target P/E multiple of 16.7x (FY23e S.A.) as against 9.6x stock is currently trading at. Our SOTP based TP is a sum of a) stand‐alone business valued at Rs 157/sh on DCF, b) Listed investment valued at Rs 41/sh and unlisted investments at Rs 40/sh.

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