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Earning beat driven by sharp jump in gas trading margin

GAIL’s 3QFY22 standalone EBITDA was ~11-14% ahead of JMFe and consensus expectations due to the sharp jump in profitability of its US LNG contracts given the steep rise in spot LNG prices and the increase in crude-linked LNG prices. Gas transmission EBITDA was in line with slightly higher volume being offset by slightly higher opex. LPG segment margin jumped QoQ as expected; petchem margin also improved QoQ vs. expectation of being steady. We maintain BUY (unchanged TP of INR 185/share) due to steady growth visibility in the company’s gas transmission business on account of various policy tailwinds. Further, the sharp rise in crude and spot LNG prices has improved earnings visibility in its gas trading and downstream businesses. At CMP, the stock trades at 1.2x FY23E P/B (vs. 3-yr average: 1.2x).

* Sharp jump in gas trading profitability; Gas transmission EBITDA slightly higher: GAIL’s 3QFY22 standalone EBITDA was INR 42bn, significantly higher than JMFe/consensus of INR 37bn/ INR 38.1bn due to the surge in profitability in the gas trading segment; similarly, PAT at INR 32.9bn was also significantly ahead of JMFe/consensus of INR 26.6bn/ INR 27.3bn. Gas trading EBITDA rose to INR 17.5bn (vs. JMFe of INR 12.2bn and INR 10.4bn in 2QFY22) due to the sharp rise in profitability of its US LNG volume given the steep rise in spot LNG prices and the increase in crude-linked LNG prices. Hence, gas trading margin jumped to INR 2,021/tcm (vs. JMFe of INR 1,400/tcm and INR 1,250/tcm in 2QFY22) while volume was also a tad higher at 96.6mmscmd. Gas transmission EBITDA was in line at INR 12.6bn (down 4% QoQ); volume was steady QoQ at 114mmscmd (vs. JMFe of a decline to 110mmscmd) but was offset by slightly higher opex resulting in EBITDA margin being a tad lower at INR 1,195/tcm (vs JMFe of INR 1,240/tcm).

* LPG margin robust as expected; petchem margin better than expected: LPG & OHC segment EBITDA was in line at INR 8.8bn as EBITDA margin jumped, as expected, to USD 424/tn (vs. USD 362/tn in 2QFY22); sales volume was also in line at 275kt. LPG pipeline EBITDA at INR 1.0bn was in line. Petchem segment EBITDA was higher at INR 4.9bn (vs. INR 3.3bn in 2QFY22) as EBITDA margin was higher at USD 301/tn (vs. JMFe of USD 197/tn); sales volume was in line at 217kt.

* Maintain BUY on valuations and improved earning visibility in downstream business: We have raised our FY22 EBITDA estimate by ~20% factoring in the strong trading margin in 3QFY22 and its likely sustenance in 4QFY22; however, our FY23-24 estimate and TP of INR 185 are unchanged. Our TP comprises: a) core business value of INR 152/share and b) other investments at INR 55/share. We maintain BUY rating due to steady growth visibility in GAIL’s gas transmission business on account of various policy tailwinds given the government’s target to increase the share of gas in India’s energy mix to ~15% by 2030 (vs. ~6.2% currently). Further, the sharp rise in crude and spot LNG prices has improved earnings visibility on its gas trading and downstream businesses — constituting 40-50% of its overall EBITDA. At CMP, the stock trades at 9.5x FY23E P/E (vs. 3-yr avg: 8.3x) and 1.2x FY23E P/B (vs. 3-yr avg: 1.2x). Key risks: a) Weak crude and spot LNG price posing risk to US LNG margin and b) a cut in gas pipeline tariff; and c) lower petchem and LPG prices.

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