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Better times ahead

We attended GAIL’s analyst meet in Delhi on 22nd March, 2023. Below are the key highlights from the meeting:

* Management highlighted that owing to supply disruptions from GMTS and recordhigh LNG prices, performance was adversely impacted across all segments in FY23. The company’s PATA plant was operating at just 50% capacity and had to shut down briefly in Oct’22.

* However, the supply situation now seems to be improving with Sefe (formerly GMTS) nominating two cargos each in March & April. Additionally, GAIL purchased 122mmscmd of gas from IGX (at USD16-17/mmBtu) and will also be bringing eight LNG cargos from the US.

* Recently approved tariff hike, LNG prices cooling off to ~USD12/mmBtu, and improvement in gas supply should improve performance going forward. Hence, we reiterate our BUY rating with a TP of INR147.

Substantial improvement in transmission segment …

* The management is quite positive on PNGRB’s revised tariff of INR58.6/mmBtu, although it was less than GAIL’s proposal of INR68/mmBtu. The next tariff review is expected to be after three years, although GAIL could go back to PNGRB for tariff revision before that as well.

* The management expects the tariff hike to offer an incremental revenue of INR18-20b on the current volumes. The management also highlighted that every mmscmd of incremental volume raises revenue by INR8.4b.

* The transmission volume guidance stands at 120mmscmd for FY24 and is expected to record a CAGR of 5% after that.

… to be complemented by other segments

? The PATA plant is now running at full utilization. Additionally, global LNG prices cooling to ~USD12/mmBtu should help register robust financial results, after posting losses for the past couple of quarters. Furthermore, the 500ktpa PDHPP plant at Usar is also expected to be commissioned by end-1HFY25.

? The management expects the gas marketing segment profits to be at ~INR35b in FY24, driven by 8-9mmscmd increase in volumes from 3QFY23 levels.

? GAIL gas volumes are also set to increase to 6.5mmscmd in FY24 from 5.5mmscmd in 9MFY23, driven by CNG station additions. The company added 19 new CNG stations in 9MFY23.

Valuation and recommendation

* The decline in LNG prices is a boon for GAIL. We expect its transmission volume to rise to 117mmscmd in FY24 from 107mmscmd in FY23. The petrochemical plant is also running at optimum utilization currently.

* GAIL is currently trading at 7.1x FY25E EPS of INR14.6 and 4.1x FY25E EV/EBITDA. We value the company at 9x adjusted FY25E EPS and add the value of investments to arrive at a TP of INR147. We reiterate our BUY rating on the stock.

* Key downside risks to our target price would be a rise in LNG prices and/or a poor economic outlook, which would adversely affect natural gas demand.

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