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Buy Gail India Ltd For Target Rs.207

Upside from spot LNG & LPG price strength

GAIL’s Q1FY22 consolidated and standalone EPS are up 3.3-6.1x YoY on EBITDA rise across segments. GAIL, in its earnings call, indicated gas marketing EBITDA would be far higher from Q2 (Rs5bn in Q1) and in FY22E it may be higher than peak of Rs28.5bn in FY19.

The main driver of far higher marketing EBITDA is likely to be trading profit of US$6.7-8.3/mmbtu in Q2-Q4 vs just US$2.5/mmbtu in Q1 on selling Henry hub (HH)-linked US LNG at spot prices. It may mean GAIL’s FY22E gas marketing EBITDA may be Rs14.9bn higher than our estimate of Rs27.6bn. Upside of Rs8.7bn is also likely to our FY22E LPG EBITDA at LPG price based on latest futures. Upside to FY22E EPS would be 7-19% and to fair value 2- 7% at higher than estimated gas marketing and LPG EBITDA. Reiterate BUY.

* Q1 EPS up 3.3-6.1x YoY on EBITDA rise across segments: Q1 standalone EPS is up 6.1x YoY driven by: 1) Gas marketing EBITDA of Rs5bn vs loss of Rs5.8bn in Q1FY21, 2) petrochemical EBITDA of Rs2.6bn vs loss of Rs430mn in Q1FY21, 3) 2.3x YoY surge in LPG EBITDA, and 4) 23% YoY rise in gas transmission EBITDA. Petrochemical volume was down 25% YoY due to maintenance shutdown while gas marketing and transmission volumes were up 18-19% YoY. Consolidated Q1 EPS is up a more modest 3.3x YoY as share of profit of associates/JV fell 5% YoY.

* 7-19% upside to FY22E EPS and 2-7% to FV likely: We keep our FY22E EPS and target price of Rs207/share (45% upside) unchanged for now. However, surge in LPG and spot LNG prices may mean upside of 54-32% to FY22E gas marketing and LPG EBITDA, 7-19% to FY22E EPS and 2-7% to FV at Rs210-221. Steeper surge in spot LNG than in HH has meant trading profit on selling US LNG would be US$6.7-8.3/mmbtu in Q2-Q4FY22E at latest futures.

GAIL has indicated 20% of LNG volumes are likely to be sold at spot prices while balance have already been tied up at oil-linked price. FY22E gas marketing EBITDA would be 54% higher than Rs27.6bn in base case at Rs42.5bn assuming 20% of FY22E US LNG volumes are sold at spot prices (trading profit of US$6.3/mmbtu), 52.5% tied at futures as of 11- Jan’21 (Brent futures at US$54.3/bbl and trading profit at US$0.01/mmbtu) and 27.5% at futures as of 14-May’21 (Brent futures at US$65.7/bbl and trading profit at US$1.3/mmbtu). FY22E LPG EBITDA would be 32% higher than base case at Rs35.6bn if LPG price is US$642/t (based on latest futures for Sep’21-Mar’22) vs US$540/t in the base case.

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