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Robust earnings driven by gas transmission and trading business

GAIL’s 1QFY24 standalone EBITDA, at INR 24.3bn, was largely in line with JMFe (but below consensus of INR 27.3bn) as gas transmission and LPG segments’ earnings were in line, while gas trading earnings rose sharply and petchem earnings disappointed. As expected, gas transmission EBITDA rose sharply to INR 13.5bn aided by higher tariff and rebound in volume. Gas trading EBITDA went up to INR 11.0bn driven by improved competitiveness of its US LNG; the management reiterated its INR 35bn EBITDA guidance for FY24. Petchem segment earnings continued to disappoint driven by negative operating leverage, high gas cost and weak global petchem prices; LPG segment earnings was in line. We maintain BUY (revised TP of INR 135) on reasonable valuation (1.2x FY25E P/B and 9.9x FY25E PE), higher tariff and steady growth visibility in the 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. ~7% currently).

* Earnings in line; gas transmission EBITDA rise sharply as expected driven by higher transmission tariff and volume:

 GAIL’s 1QFY24 standalone EBITDA, at INR 24.3bn, was largely in line with JMFe of INR 24.9bn (but below consensus of INR 27.3bn) as gas transmission and LPG segments’ EBIT were in line, while gas trading EBIT was   significantly higher and petchem EBIT disappointed. Hence, PAT was INR 14.1bn, below JMFe/consensus of INR 15.4bn/ INR 18bn. Gas transmission EBITDA rose sharply to INR 13.5bn, as expected. Transmission volume was   higher at 116.3mmscmd vs. JMFe of 114mmscmd (vs. 108.2mmscmd in 4QFY23) while transmission EBITDA margin jumped to INR 1,276/tcm driven by upward revision in tariff. The management expects volume to grow to   123mmcmd by end-FY24, and grow further at 6-7% CAGR to 138-140mmscmd by end-FY26. Moreover, the management expects transmission business opex to decline going forward as it was higher in 1QFY24 due to carry over of   a high cost LNG cargo.

* Gas trading margin jumps sharply; management reiterates INR 35bn EBITDA guidance for FY24:

 Gas trading EBITDA was significantly higher at INR 11.0bn vs. JMFe of INR 6.4bn (and vs. INR 5.8bn in 4QFY23) – this seems to be driven by strengthening competitiveness of its US LNG vis-à-vis oil-linked and spot LNG and   normalisation of Gazprom LNG supply. Hence, gas trading margin jumped to INR 1,226/tcm in 1QFY24 vs. JMFe of INR 700/tcm (vs. INR 663/tcm in 4QFY23) while volume was in line at 98.8mmscmd (vs. 96.5mmscmd in 4QFY23).

* Petchem segment earnings continue to disappoint; LPG segment earnings was in-line:

 Petchem segment disappointment continued as it reported negative EBITDA of INR 1.7bn in 1QFY24 vs. JMFe of positive INR 1.1bn (vs. negative INR 2.6bn in 4QFY23) as petchem sales recovered to only 162ktpa or 80% utilisation   vs. JMFe of 200ktpa (from 118ktpa in 4QFY23); hence, continued negative operating leverage, high gas cost and weak global petchem prices led to EBITDA margin being at negative USD 130/tn (vs. negative USD 265/tn in 4QFY23)   vs. JMFe of positive USD 68/tn. Separately, LPG & OHC segment EBITDA was in line with JMFe at INR 2.3bn as recovery in EBITDA margin was in line at

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