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Strong FY22E on record gas marketing EBITDA

GAIL’s Q2FY22 standalone and consolidated EPS are up 2.5-2.8x YoY on EBITDA rise in most segments. Q2 gas marketing EBITDA is at Rs10.8bn vs our estimate of Rs9.7bn. At latest spot LNG and Henry Hub (HH) futures, we estimate H2 gas marketing EBITDA at Rs61.2bn vs Rs15.8bn in H1; Q3-Q4 profit on selling HHlinked US LNG at spot prices works out to US$24.2-18.3/mmbtu vs US$9.5/mmbtu in Q2. Thus, FY22E gas marketing EBITDA may be Rs77bn, but we raise it to Rs43bn vs Rs27.6bn earlier. We cut FY22E petrochemical EBITDA by 29% to Rs20bn factoring in disappointment in H1. The net impact is 9% upgrade in FY22E EPS. Our target price remains unchanged at Rs218 (47% upside). Upside to FY22E EPS would be 23% if gas marketing is at Rs77bn. Reiterate BUY.

* Q2 EPS jump on rise in EBITDA across segments: Q2 standalone EPS is up 2.5x YoY driven by 1) gas marketing EBITDA surge to all-time quarterly high of Rs10.8bn vs loss of Rs3.1bn in Q2FY21, 2) 67% YoY rise in petrochemical EBITDA, 3) 2.3x YoY surge in LPG EBITDA, and 4) 3% YoY rise in gas transmission EBITDA. Gas transmission and gas marketing volumes were up 7- 10% YoY while petrochemical and LPG production volumes were down 1-12% YoY. Consolidated Q2 EPS is up 2.8x YoY.

* Earnings call takeaways: 1) Gas transmission volumes are guided to rise to 120mmscmd in FY23E; 2) 16mmscmd capacity Urja Ganga pipeline utilisation is guided to ramp up to 75% by end-FY23; 3) Gorakhpur, Barauni and Sindhri fertiliser plants, which are in pre-commissioning/commissioning stage, are guided to ramp up fully to consume 6mmscmd gas by mid-CY22; 4) gas marketing EBITDA, which was at all-time high of Rs10.8bn in Q2, is guided to sustain/improve in H2; 5) GAIL and its subsidiaries are implementing 7,500km of pipelines, which would cost Rs370bn and 6) capex was Rs31.8bn in H1 and is guided at Rs74bn in FY22E.

* Raise FY22E EPS by 9%: We have raised our gas marketing EBITDA estimate to Rs43bn vs Rs27.6bn earlier and cut petrochemical EBITDA to Rs20bn vs Rs28bn earlier. The net impact is upgrade in FY22E EPS by 9%.

* 23% upside to FY22E EPS: At latest spot LNG and HH futures, we estimate GAIL’s FY22E gas marketing EBITDA may be as high as Rs77bn vs Rs43bn estimated by us. If it is indeed at Rs77bn, upside to FY22E EPS would be 23%.

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