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Strong marketing and petchem show, higher oil prices to support

* Q4FY21 standalone EBITDA/PAT of Rs25.6bn/19.1bn were 15%/18% above our estimates. EBITDA was flat yoy/up 34% qoq and a beat due to better-than-expected gas marketing and petchem performance. PAT was driven by Other Income (22% above estimate).

* Gas transmission EBITDA fell 3% qoq to Rs12.0bn but was a 5% beat on lower opex. Volumes were flat qoq/up 1% yoy at 109.8mmscmd. Marketing EBITDA turned positive qoq at Rs3.0bn (a major beat), driven by higher RLNG margins. Volumes fell 4% qoq to 91.4mmscmd.

* Petchem EBITDA came in at Rs7.2bn - a 28% beat on lower gas cost - with Pata utilization at 112%. LPG & LHC EBITDA rose 63% qoq to Rs5.0bn (8% miss). Realization discount to Arab propane-butane expanded while sales volume was down 19% qoq to 257kt.

* We raise FY22/23E EPS by 19%/23%, building in higher gas marketing-petchem margins and Other Income. We increase TP to Rs190 from Rs160 earlier, valuing GAIL at a blended core FY23E EV/EBITDA multiple of 5.8x. Retain Buy with OW stance.

Q4FY21 highlights:

Gas pipeline tariff was 1% lower qoq at Rs1.4/scm. LPG transmission EBITDA fell 5% qoq, with volumes/tariff down 3%/1%. RLNG portfolio margin came in at USD0.13/mmbtu (from neg. USD0.1 in Q3). Petchem average realization rose 14% qoq. The tax rate was higher at 27%. Consolidated gas marketing EBIT of Rs6.7bn in Q4 was much higher, indicating global trading gains.

For FY21, GAIL’s EBITDA/APAT fell 24%/11% to Rs64.5bn/48.9bn due to gas marketing loss and lower LPG & LHC earnings yoy, partly offset by ~7x+ jump in petchem EBITDA. Other Income was up 41%. Capex in FY21 was Rs70bn, mainly on pipelines while debt was ~Rs60bn.

Guidance:

Apr-May saw 10-15% transmission volume hit due to Covid but now back to 110mmscmd. GAIL expects 6-8% volume CAGR in next three years. The Gorakhpur fertilizer plant has started commissioning and by Sep’21 will take full gas. Barauni and Sindri should come up by CY21-end. Matix should start from July. It is on track for Dec’2021 commissioning of most JHBDPL sections. KBPL should take 1.5 years. GAIL is looking at InvITs in two pipelines and has sought approvals from MOPNG-Govt. LNG margin is a factor of international prices.

It has 80%/50% of US LNG volumes tied up for FY22/23. It has taken shutdown in Pata in Q1 but should do 810-815kt annually. New Usar plant will run on imported propane, and spreads will be better. FY22/23/24 capex guidance is Rs70bn/120bn/90bn with Rs100bn+ cumulatively on petchem with new plants completion by Sep’23. GAIL is foraying into new businesses like CBG, ethanol 1G refineries and renewable energy to diversify. It targets 1GW of solar+wind in 3-4 years. It has reduced contingent liabilities by Rs20bn.

Valuation:

We value GAIL on SoTP basis with listed/unlisted investments at a 30/25% holdco discount. Key risks: adverse commodity prices-margins, currency, regulations and outages.

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