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Petrochemical segment woes continue

* GAIL reported EBITDA at INR24.3b in 1QFY24, 11% below our est. of INR27.3b due to a weak performance in petchem segment.

* Petchem segment reported EBIT loss for the fourth consecutive quarter due to a weak pricing environment. The management highlighted that if prices remain at current levels, gas prices need to cool down to USD10-11/mmBtu from USD13/mmBtu in 1QFY24 for petchem segment to breakeven.

* Transmission segment recorded a benefit of INR6.6b in 1QFY24 due to a tariff hike implemented on 1st Apr’23. The benefit is expected increase going ahead as volumes ramp up further. The management expects gas transmission volumes to reach 123mmscmd by the end of FY24 and ~138- 140mmscmd over the next 2-3 years from 116mmscmd currently.

* Owing to the underperformance in 1QFY24, we cut our FY24E EBITDA/PAT by 12% while keeping FY25 estimates broadly unchanged.

* We value the core business at 10x FY25E adjusted EPS of INR12. Adding the value of listed and unlisted investments of INR25, we arrive at a TP of INR145/share. Maintain BUY.

Miss due to weak performance in petchem segment

* EBITDA came in 11% lower than our estimate at INR24.3b (-44% YoY,+692% QoQ) primarily due to a weak performance in petchem segment (consensus miss by 13% ).

* PAT was 26% lower than our est. at INR14.1b (-26% YoY, +134% QoQ) due to lower-than-estimated other income at INR2.7b (INR10.2b in 4QFY23), missing consensus estimates by 14%.

* As per regulations, the difference between UFT and ‘Integrated tariff’ needs to be settled between entities and the settlement committee on a fortnightly basis.

* As on 30th Jun’23, GAIL had a deficit of INR837.2m after the settlement.

* On 1st Jun’23 the company completed the acquisition of GAIL Mangalore Petrochemicals Ltd (formerly JBF Petrochemicals Ltd).

Segmental EBIT details for 1QFY24

* Gas transmission business reported EBIT of INR10.2b (est. INR12.7b).

* LPG transmission posted I n-line EBIT at INR802m (-4% YoY, +1% QoQ).

* Trading business reported EBIT of INR10.1b (vs. INR23.1b in 1QFY23 and INR4.9b in 4QFY23).

* Petchem segment reported EBIT loss of INR3b (EBIT of INR352m in 1QFY23 and loss of INR4b in 4QFY23).

* LPG and HC reported EBIT of INR2b (vs. INR6.3b in 1QFY23 and INR1.2b in 4QFY23).

Valuation and view

* GAIL has guided for a capex of ~INR90-100b in FY24, with INR40b being spent on pipelines, INR32b for petrochem segment, INR7 for operations, INR2b for CGDs and the rest for equity investments and other.

* The remaining portion of the Jagdishpur-Haldia pipeline is expected to be completed by Jun’24. The mechanical completion of the PP plant at PATA and the PDH-PP plant at Usar is expected by Jul’24 and Oct’25, respectively.

* Domestic allocation for internal consumption in the transmission segment has fallen from 1.55mmscmd to 0.4mmscmd currently. The management guides that it has represented for recovery of the one-off actual costs in transmission to the regulatory board.

* The stock trades at a ~9% discount to its one-year forward long-term P/E average. By valuing the core business at 10x FY25E adjusted EPS of INR10 and adding the value of listed and unlisted investments of INR26, we arrive at a TP of INR145/share. We maintain BUY on the stock.

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