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Doing good, expecting even better – reiterate Buy

* GAIL reported an EBITDA in line with our estimate, as better performance in Gas Trading and LPG and Liquid HC business offsets lower profitability in the Petchem segment (impacted due to the planned shutdown in 1QFY22).

* The management guided that the Petchem plant is currently operating at over 100% utilization and will achieve 100% utilization in FY22, despite the lower utilization rate in 1Q.

* In the current high spot LNG price environment (JKM forward curve at USD15-16/mmbtu, up from USD10/mmbtu in 1QFY22), the company expects the Trading segment to do even better in 2Q.

* Transmission volumes, which were lower in 1QFY22 (108mmscmd, -2% QoQ on account of a lower offtake by a few customers), have recovered back to ~115mmscmd at present. The management expects 8-10mmscmd of volume growth in FY22 from the commissioning of fertilizer plants, aiding domestic placement of trading volumes.

* GAIL has enjoyed alignment of operational macros since the start of CY21. We expect macros to support the company (as discussed above) over the next couple of quarters as well.

* Valuing the core business at 10x Sep’23E adjusted EPS of INR15.7 and adding investments, we arrive at our TP of INR200/share. The stock is trading at 8.8x FY23E P/E and 5.7x FY23E EV/EBITDA. We reiterate GAIL as our top pick in the largecap O&G space.

EBITDA in line with our estimate; fertilizer plants to aid growth

* EBITDA came in line with our estimate at INR24.1b (+287% YoY, -6% QoQ). PAT stood at INR15.3b (+499% YoY, -22% QoQ owing to lower other income).

* Update on fertilizer plants:

* GAIL said MCFL has already started drawing gas, and that MRPL and OMPL would ramp up going forward (gas offtake at 2mmscmd currently, likely to increase by 0.5-1mmscmd).

* The Ramagundam plant has been commissioned (currently consumes ~2.5mmscmd).

* The Gorakhpur plant is in the later stage of pre-commissioning (gas offtake ~0.1mmscmd currently. It will increase to 2mmscmd by Dec’21).

* The Matix plant is likely to start gas offtake from Sep’21 (under commissioning in Aug’21).

* Sindri and Baurani plants are ready and would reach peak capacity by May’22 (pre-commissioning of gas supply to start in Aug’21).

Valuation and view

* GAIL expects gas transmission volumes to grow at 7-8% YoY over the next 3-4 years, with further upside after the completion of the national gas grid. Increased demand will primarily be from commissioning of fertilizer plants, ongoing refinery and petchem expansions, and development of CGDs (under IXX round). We conservatively forecast transmission volume of 115/125/130mmscmd in FY22E/FY23E/FY24E v/s 104mmscmd in FY21 (110mmscmd in 4QFY21). An increase of 10mmscmd in transmission volume would result in a rise of ~5% in our EPS estimate.

* Capex guidance for FY22/FY23 stands at INR70b/INR120b (INR70b in FY21). GAIL is currently executing various projects worth INR400b.

* Dabhol terminal has already awarded a break water development project to L&T (completion expected by the end of 3QFY23).

* The stock trades at a discount of ~35% to its one-year forward long term P/E average. We haven’t ascribe any valuation so far to GAIL Gas (current volumes at 5.5mmscmd). If volumes pick-up in CGDs, especially Bengaluru, then it may result in additional value.

* The biggest risk to our call is a sharp decline in oil price before the Fertilizer companies commence operations, which may create uncertainty in the trading segment. We reiterate our Buy rating.

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