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Oil price surge set to drive EPS rebound in FY22E

GAIL India’s (GAIL) standalone Q3FY21 EPS was up 19% YoY, despite gas marketing being in the red, on surge in petrochemical EBITDA, other income and fall in tax rate. Consolidated Q3 EPS rise was steeper at 34% YoY as its share in profit of associates and JVs was up 20% YoY and tax fall was steeper. We have raised FY21E EPS by 13%, despite cutting gas marketing EBITDA to factor-in Q3 disappointment, mainly due to upgrade in LPG and petrochemical EBITDA given the price surge in Q4. We also raise FY22E EPS by 25% due to the improved petrochemical outlook and assuming Brent at US$60/bbl vs US$55/bbl earlier, which has boosted gas marketing and LPG EBITDA. Target price is up 13% to Rs164 (22% upside) due to upgrade in FY22E estimates and despite being based on lower multiples. We upgrade GAIL to BUY from Hold.

* Q3 EPS up YoY driven by petrochemicals, other income and lower tax: Q3FY21 standalone EPS was up 19% YoY, despite gas marketing EBITDA in the red at minus Rs450mn vs Rs5.24bn in Q3FY20, driven by 5.2x YoY jump in petrochemical EBITDA (rise in realisation and volumes by 9% YoY), 51% YoY rise in other income and tax being down 39% YoY, despite flat PBT, on lower tax rate. LPG transmission, gas transmission and LPG EBITDA were flat YoY. Q3 gas transmission and marketing volumes too were flat YoY, but up 4-8% QoQ at 110.3-95.6mmscmd, respectively. Rise in share of profit from associates and JVs by 20% YoY at Rs4.8bn, and steeper tax decline, meant consolidated Q3 EPS rise was steeper at 34% YoY.

* Takeaways from earnings call: 1) Most of the US LNG volumes have been tied up at a profit for FY22E; 2) gas marketing EBITDA outlook for Q4FY21E, and for FY22E, has improved significantly due to surge in Brent to over US$60/bbl; 3) petrochemical utilisation is likely to be at least 110% and margin outlook too is good; 4) FY22E gas transmission volumes expected to rise by 5-7% YoY due to commissioning of several pipelines including Jagdishpur-Haldia-Bokaro-Dhamra pipeline & fertiliser plants along the pipeline, which on ramping up would boost volumes by 11mmscmd; 5) most of US LNG is likely to be sold in India from Dec’22 after all new fertiliser plants ramp up (vs ~50% being sold in the international market until now) and; 6) capex in 9MFY21 was Rs36.7bn & would be Rs66bn in FY21.

* Raise FY21-FY22E EPS & target price: We have cut FY21E gas marketing EBITDA by Rs4.4bn to factor-in Q3 disappointment and now estimate it to be in the red at minus Rs1.4bn. However, we have raised FY21E EPS by 13% due to upgrade in LPG & petrochemical EBITDA given the price surge in Q4. We have also raised FY22E EPS by 25% due to the improved petrochemical outlook and assuming Brent at US$60/bbl vs US$55/bbl earlier, which has boosted LPG EBITDA & gas marketing EBITDA to Rs27.6bn from Rs19.2bn earlier. Downside risk of spot LNG locked in at lower price in Q4 than estimated and fall in Brent remains.Target price is up 13% to Rs164 (22% upside) due to upgrade in FY22E estimates and despite valuing gas marketing at 3x (vs 5x earlier) and LPG and petrochemicals at 5x (6x earlier) FY22E EBITDA.

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