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Inventory losses weigh on 3Q earnings

Our view

GAIL reported 3QFY23, significantly below estimates, with operating profit at Rs 2.6bn (-94% YoY; -85% QoQ), primarily on Rs 11bn in inventory losses related to two unsold cargoes. Adjusted for the same the operating profit stood at Rs 13.6bn, which nonetheless, is still lower than our estimates (YES: Rs 17.2bn), due to operating losses in LPG-LHC segment. GAIL continues to reel under the disruption of supply from Gazprom, impacting its gas trading and petrochemical segments. While GAIL is in negotiation with other suppliers to fulfill the gap of 8-9mmscd, but at this moment any conclusive update on the same is pending. GAIL has additionally filed for revision in tariff as per revised regulations and tariffs are likely to be updated by Apr’23. While there are near-term challenges but maintain BUY on long term fundamentals, as stock continues to trade at inexpensive valuation of 8x FY25e.

Result Highlights

* Profitability: Reported Operating Profit and PAT stood at Rs 2.6bn (-94% YoY; - 85% QoQ) and Rs 2.5bn (-93% YoY; -84% QoQ), respectively. Thereby resulting in the 9M Ebitda and PAT of Rs 63.9bn (-37% YoY) and Rs 46.9bn (-39%) respectively. Adjusted for inventory loss of Rs 11bn, the 9M Ebitda stood at 74.9bn (-26% YoY) and PAT at Rs 55.2bn (-28% YoY).

* NG Transmission: Gas transmission volume stood lower by 9% YoY & 4% QoQ at 103.7mmscmd (2QFY23: 107.7mmscmd). The segment revenue stood at Rs 16.6bn (-1% YoY; -2% QoQ) and Ebitda at Rs 7.2bn (-42% YoY; -28% QoQ). While higher utilization in the Jagdishpur Haldia section, improved effective tariffs, but the same was offset by a) overall lower throughput and b) higher operating expense (due to higher fuel cost as APM allocation was reduced for use as fuel)

* NG Trading: NG trading volume stood lower by 7% YoY and 3% QoQ at 89.9 mmscmd. The NG segment trading margins also declined YoY and QoQ to USD (0.04)/mmbtu (from USD 0.15/mmbtu in 2Q), on account of inventory loss of USD 0.47/mmbtu (Rs 11bn). Non availability of contracted gas from Gazprom was additional factor behind weaker profitability in gas trading segment.

* Petrochemicals: Petchem, sales stood weaker at 68TMT (-69% YoY; -37% QoQ) on lower utilization due to limited availability of feedstock gas. Realizations also declined sequentially to Rs 110/kg (2Q: Rs 125/kg); Revenue and Ebitda for the segment therefore stood at 7.5bn (-69% YoY; -44% QoQ) and Rs (2.1)bn; weaker operating profit stemmed from lack of operating leverage.

* LPG-LHC: Sales for the quarter stood at 248TMT (-10%YoY; +7% QoQ). The Revenue for the segment stood at Rs 13.5bn (-12% YoY -3% QoQ); Ebitda stood at a loss of Rs 60 mn.

Valuation

Maintain BUY rating on GAIL, with a revised Mar’24 TP of Rs 135/sh

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