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Firing on all cylinders

JKM spot LNG price is up 72% from low of US$5.6/mmbtu in early-Mar’21 to US$9.65/mmbtu as severe winter depleted gas inventories in North Asia and Europe leading to competition for LNG supplies (see report). Brent is up 84% from lows in end-Oct’20 to US$68/bbl as OPEC+ capped supplies. Steeper rise in oil and spot LNG vs in Henry Hub (HH) gas price has meant GAIL can sell its HH linked US LNG at higher spot LNG/oil linked prices, thereby, improving its gas marketing outlook. Supply disruptions in the US have boosted polyethylene margins and outlook. We have raised FY22E EPS by 8% and target price to Rs184 mainly on assumption of higher petrochemical EBITDA. Further upside in gas transmission, marketing and petrochemicals is not ruled out. Reiterate BUY.

* Brent & spot LNG surge may mean 65-79% upside to FY22E gas marketing EBITDA:

Brent for FY22E based on FY22-TD price and futures for rest of FY22 works out to US$66/bbl. JKM spot LNG on similar basis works out to US$10/mmbtu. We estimate GAIL’s FY22 gas marketing EBITDA at Rs27.6bn assuming all US LNG sold is at oil linked price with Brent at US$60/bbl. At latest Brent futures, FY22E gas marketing EBITDA is estimated at Rs45.4bn and at Rs49.4bn if 10 cargoes are assumed to be sold at spot LNG prices. Actual gas marketing EBITDA would depend on futures prevailing when volumes were tied up.

* Raise FY22E petrochemical EBITDA by 52%:

GAIL’s Q3FY21 petrochemical EBITDA was at Rs5.5bn. We estimate Q4 EBITDA at Rs7.8bn and that for Q1FY22E based on QTD margins at Rs8.5bn. To factor strength in margins we have raised FY22E EBITDA by 52% to Rs24.6bn. Further upside to EBITDA would be 26- 39% at Rs31-34bn if it is at annualised Q4FY21-Q1FY22E EBITDA level.

* Raise FY22E EPS & target price by 8-12%; further upside possible:

Upgrade in petrochemical EBITDA led to an upgrade in FY22E EPS by 8% and target price (gas marketing and LPG production EV at 4-6x EBITDA vs 3-5x earlier) by 12% to Rs184 (18% upside). If FY22E gas marketing EBITDA is higher than base case at Rs45.4- 49.4bn and petrochemical EBITDA at Rs31-34bn, upside to fair value (lower multiple of 3-4x) would be 3-6% at Rs190-195 and to FY22E EPS 20-26%.

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