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Q4FY21 earnings call takeaways

Key takeaways from GAIL’s Q4FY21 earnings call:

* Upside likely to our FY22E gas marketing EBITDA of Rs27.6bn. 80% of FY22E long-term contracted LNG is tied up. 20% is not tied up deliberately to gain from high spot LNG prices. Some volumes to be sold in FY22E were tied up earlier at lower oil prices, which will drag down gas marketing EBITDA. However, 20% of LNG volumes, not yet tied up, are likely to boost EBITDA as they would be sold at spot LNG price; Jul’21-Mar’22 spot LNG futures were at US$10.9-12.8/mmbtu as of 9-Jun’21 and profit on selling Henry Hub linked US LNG at spot prices is estimated at US$3.4- 5.0/mmbtu in Jul’21-Mar’22. We estimate gain from selling 16% of US LNG at spot prices vs at oil linked prices at Rs7.3bn in FY22E. Actual gain may be higher at Rs12.4bn as 28% of US LNG (20% of total LNG) may be sold at spot prices (Link).

* 50% of FY23E long-term contracted LNG has been tied up, 30% has been tied up but positions are kept open and 20% has not been tied up. A large part of already tied-up volumes was probably tied up when FY23E Brent futures were well over US$60/bbl and therefore, should be reasonably profitable. 30% of volumes tied up but on which positions are kept open would allow GAIL to gain from rise in trading profit if Brent futures further rise. FY23E Brent futures are up from US$61.7/bbl in mid-Mar’21 to US$67.3/bbl now while spot Brent is up from US$68.2/bbl to US$71.5/bbl. 20% of volumes not yet tied up, if sold at spot LNG price, will drag down EBITDA, as even in winter, profit on sale of US LNG at spot prices (at prevailing futures) is just US$0.2/mmbtu vs US$1.4/mmbtu if sold at oil-linked prices.

* Gas transmission growth is guided at 6-8% YoY in FY22-FY24E (vs our FY22- FY23E estimate of 4-8%) and stronger growth thereafter. Volumes were down 10-15% from Q4 level by mid-May’21 but are now back to 110mmscmd (Q4 level). Four fertiliser plants guided to be commissioned in next one year would drive growth.

* Gas transmission utilisation is guided to rise to 75% in 4-5 years. GAIL’s tariff is calculated assuming 75% utilisation but it is lower, which means lower returns.

* 1,905-km Jagdishpur-Haldia-Bokaro-Dhamra pipeline is on track to be commissioned as scheduled in Dec’21 except Haldia-Durgapur section.

* FY22E petrochemical volumes are guided at 810-815kt vs our estimate of 883kt (872kt in FY21) implying downside to our volume estimate. Petrochemical plant was shut from mid-Apr’21 to end-May’21, which will hit Q1 volumes.

* Capex is guided at Rs70bn in FY22E, Rs120bn in FY23E and Rs90bn in FY24E.

* Rs470bn capex - Rs100bn on petrochemicals and Rs370bn on pipelines - is planned; Rs113bn of this capex is already incurred.

* CGD subsidiary GAIL Gas’ revenue was Rs40bn and net profit Rs1.57bn (flat YoY) in FY21. GAIL Gas’ performance has been hit by performance of Bengaluru CGD, which broke even in FY21 and is guided to turn profitable in FY22E.

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