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Weaker Gas trading weighs on earnings

Our view

GAIL’s 2QFY23 reported operating profit at Rs 17.6bn (-49% YoY; -60%QoQ) stood below our (YES: Rs 33.5bn) & street estimates (Rs 31bn). The miss on estimates stemmed from a) weaker than expected marketing margins in the gas trading segment, b) higher operating costs in the gas transmission segment on de-allocation of 0.45mmscmd domestic gas and c) along with deeper than expected losses in the petrochemical segment. Disruption of supply from Gazprom, resulted in shortfall of 17 LNG cargoes in 1HFY23 so far, resulting in supply rationing for GAIL’s consumers and its PATA petrochemical plant as well. GAIL tried to bridge some of the shortfall through sourcing of spot LNG cargoes, which in-turn impacted trading margins due to high spot prices. Given the geo-political nature of the supply disruption, a resolution in the immediate term appears uncertain. Maintain BUY on long term fundamentals.

Result Highlights

* Profitability: Operating Profit and PAT stood at Rs 17.6bn (-49% YoY; -60% QoQ) and Rs 15.4bn (-46% YoY; -47% QoQ), respectively. Thereby resulting in the 1H Ebitda and PAT of Rs 61.3bn (+4.1% YoY) and Rs 44.5bn (+1.4%) respectively.

* NG Transmission: Gas transmission volume stood lower by 6% YoY & 2%QoQ at 107.7 mmscmd (1QFY23: 109.5mmscmd). The segment revenue stood at Rs 16.9bn (+3% YoY; +2% QoQ) and Ebitda at Rs 10.1bn (-23% YoY; -7% QoQ), implying a weaker operating margin of 65% (1QFY23: 72.4%). While improved utilization in the Jagdishpur Haldia section, improved effective tariffs and therefore revenue, but higher operating expense (gas cost) led to weaker Ebidta margins

* NG Trading: NG trading volume stood lower by 5% YoY and 8% QoQ at 92.5 mmscmd. The NG segment trading margins also declined YoY and QoQ to USD 0.15/mmbtu (-67% YoY; -83% QoQ). Non availability of contracted gas from Gazprom was the key reason behind weaker profitability in gas trading segment.

* Petrochemicals: Petchem, sales stood weaker at 108TMT (-51% YoY; -1% QoQ) on lower utilization due to limited availability of feedstock gas. Realizations also declined sequentially to Rs 125/kg; Revenue and Ebitda for the segment therefore stood at 13.5bn (-41% YoY ; -7% QoQ) and Rs (2.1)bn; weaker operating profit stemmed from lack of operating leverage.

* LPG-LHC: Sales for the quarter stood at 231TMT (-12%YoY; +5% QoQ). The Revenue for the segment stood at Rs 13.9bn(+25% YoY -4% QoQ); ,Ebitda stood at Rs 5.2bn (-25% YoY; -21% QoQ). QoQ weaker LPG prices effected a sequential drop in operating profits.

Valuation

Maintain BUY rating on GAIL, with a revised Mar’24 TP of Rs 140/sh as we roll estimates forward and introduce FY25e.

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