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Higher gas usage cost weighs on 4Q earnings

Our view

GAIL reported 4QFY23, significantly below estimates, with adjusted operating profit at Rs 3.1bn (-92% YoY; -77% QoQ), primarily on weaker than estimated earnings in gas transmission and petrochemical segment. Gas transmission segment reported a pre-tax loss of Rs 164mn due to one-time provision of Rs 1.10 related to rerouting of TN section of KKMBPL and due to higher SUG expense as APM allocation for SUG got incrementally reduced by 0.5mmscmd during the quarter. GAIL’s p/l tariff was recently (Mar’23) revised upwards to Rs 58.6/mmbtu, however given notified tariff factors for a lower price (than the prevailing prices) for APM & HPHT gas to be used as SUG, GAIL is of the view that tariffs need further upward revision to factor for the same. In light of the revised NGPL tariff regulations (Nov’22), the cost of SUG as fuel is recoverable as operating cost and therefore, we foresee a high probability for revision in pipeline tariff to adjust for the same. Going ahead, with moderation in domestic gas and LNG prices, the business for GAIL appear to be improving across segments. Maintain BUY

Result Highlights

* Profitability: Adjusted Operating Profit and PAT stood at Rs 3.07bn (-92% YoY; - 77% QoQ) and Rs 6.03bn (-78% YoY; +146% QoQ), respectively. The FY23 Ebitda and PAT stood at Rs 77.9bn (-44% YoY) and Rs 53bn (-49%) respectively.

* NG Transmission: Gas transmission volume stood higher by 1% YoY & 4% QoQ at 108.2mmscmd (3QFY23: 103.7mmscmd). The segment revenue stood at Rs 16.5bn (+4% YoY; -1% QoQ) and Ebitda at Rs 2.97bn (-74% YoY; -59% QoQ). The 4Q segment Ebitda was impacted by a) one-time provision of Rs 1100mn related to re-routing KKMBL, b) incremental de-allocation of SUG gas, which increased dependence on LNG and therefore operating costs were higher in the quarter and c) provision of Rs 0.7bn related to a dispute

* NG Trading: NG trading volume stood higher by 2% YoY and 7% QoQ at 96.5 mmscmd. The NG segment trading margins also improved YoY and QoQ to USD 0.19/mmbtu (from USD (0.04) /mmbtu in 3Q).

* Petrochemicals: Petchem, sales improved to 118TMT (-45% YoY; +74% QoQ) as PATA plant reverted to full utilization in early Mar’23 when LNG prices cooled off, after running at low operating rates over Jan-Feb’23. Realizations also improved QoQ to Rs 115/kg (3Q: Rs 110/kg); Revenue and Ebitda for the segment therefore stood at 13.5bn (-46% YoY; +81% QoQ) and Rs (2.5)bn; weaker operating profit stemmed from lack of operating leverage.

* LPG-LHC: Sales for the quarter stood at 230TMT (+6%YoY; -7% QoQ). The Revenue for the segment stood at Rs 13.6bn (+13% YoY +1% QoQ); Ebitda stood at a Rs 1.5bn.

Valuation

Maintain BUY rating on GAIL, with a Mar’24 TP of Rs 150/sh.

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