Buy GAIL Ltd For Target Rs. 200 - Emkay Global
Higher gas marketing margins and petchem realizations drive major beat
* GAIL’s Q2FY22 standalone EBITDA/PAT rose 44%/87% qoq to Rs34.8bn/Rs28.6bn, 38%/49% above our estimates due to better-than-expected gas marketing and petchem numbers. Other income was 23% above estimates at Rs7.7bn. The tax was low at 22.3%.
* Gas transmission EBITDA was up 12% qoq at Rs13.1bn (a 5% miss due to higher opex), as volumes improved 6% to 114.3mmscmd. Marketing volumes rose 2% qoq to 97.7mmscmd, with RLNG portfolio margin at ~USD0.5/mmbtu (est. USD0.24).
* Petchem capacity utilization was healthy at 106%, with EBITDA of Rs4.8bn (up 89% qoq) and a surprise beat due to a higher India premium vs. Asia. LPG&LHC at Rs7.0bn was a 24% miss due to a high 11% discount to the Aramco benchmark and a rise in unit opex.
* We raise FY22E PAT by 19% on higher spot LNG prices/margins and H1 run rate, though our FY23-24 estimates and TP are unchanged. We roll over valuations to Dec’23E. Retain Buy/OW with a Rs200 TP, valuing the core business at blended 5.7x EV/EBITDA (vs. 5.8).
Highlights:
The average transmission tariff was range-bound at Rs1.4/scm. LPG transmission EBITDA fell 5% qoq, with volumes up 3%, tariffs down 1% and unit opex up. Petchem average realization rose 4% qoq, with healthy Indian demand and premiums. Reported gas marketing EBITDA rose to Rs11.2bn in Q2 from Rs4.2bn in Q1FY22. Other Segments’ EBITDA was also high at Rs5.3bn. The share of profit from associates/JVs rose from Rs4.3bn to Rs4.8bn qoq. H1 capex was Rs31.8bn (on pipelines, equity and petchem).
Guidance:
GAIL has different portfolios and synergies to mitigate gas trading risks and it’s not just hedging alone. It expects to maintain strong Q2 margins and segment earnings. Pipeline volumes rose as Matix and RFCL were running on full capacity. Power demand had also returned and CGD was rebounding. GAIL expects transmission volumes to reach 120mmscmd+ next year vs. current 114mmscmd. The Gorakhpur fertilizer plant would be commissioned shortly, while Barauni and Sindri are under pre-commissioning. Gas demand from these plants should reach 5.6mmscmd by mid-CY22. GAIL is confident of 100%+ utilization for the year and sustainable margins in petchem going ahead. LPG prices would improve further and the APM gas price hike won’t impact much. FY22 capex target is Rs74bn. It has spent Rs122.1bn on PM Urja Ganga so far and received Rs44.8bn of VGF. GAIL and its JVs are implementing 7,500km of pipelines at Rs370bn capex. GAIL got dividend income of Rs4.65bn in Q2. Hydrogen technology is being evaluated and the company would later share details about where and how it will be implemented.
Valuation:
We value GAIL on the SoTP basis with a 5.7x blended target Dec’23E EV/EBITDA for the standalone business (vs. 5.8x earlier) and investments at a 25-30% BV-FV holdco discount. Key risks: adverse commodity prices-margins, currency, regulations and outages.
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