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In-line quarter; gas supply headwinds ahead

Our view

The 1QFY23 operating profit at Rs 43.7bn (+81% YoY; +18% QoQ), stood in-line with our but above street estimates. The profitability during the quarter was driven by YoY& QoQ stronger natural gas trading volume and trading margins, even as segment earnings for NG transmission, Petrochemicals and LPG-LHC stood weaker. While NG transmission margins weakened on higher operating costs, lower production and higher raw material costs (natural gas) weighed on petrochemical segment. In addition, shortfall in supply of term LNG from Gazprom has queered the near-term outlook for GAIL. Out of GAIL’s 14mmt LNG portfolio, Gazprom contract amounts to 2.5mmt, which translates into 36 cargoes annually. In the 1QFY23, Gazprom did not deliver 8 cargoes, if the disruption continues, then GAIL’s NG trading & transmission could get impacted on under-supply. In addition, since GAIL has lowered its internal consumption, in order to cater to its consumers, GAIL’s petrochemicical producton could also get impacted. We adjust our earnings to reflect the above and as result revise our TP to Rs 205/sh (from Rs 230/sh) but maintain BUY on favorable longer term prospects.

Result Highlights

* Profitability: Operating Profit and PAT stood at Rs 43.7bn (+81% YoY; +18% QoQ) and Rs 29.2bn (+91% YoY; +9% QoQ), respectively. The profitability during the quarter was driven by stronger gas trading margins.

* NG Transmission: Gas transmission volume stood higher by 2% YoY & 2% QoQ at 109.5 mmscmd . The segment revenue stood at Rs 15.05bn (+12% YoY; +6% QoQ) and Ebitda at Rs 10.9bn (-7% YoY; -6% QoQ), with operating margin weaker at 72.4%, due to higher operating expense as APM prices increased to USD 6.1/mmbtu (from USD 2.9/mmbtu)

* NG Trading: NG trading volume stood higher by 5% YoY and 6% QoQ at 100.8 mmscmd. The NG segment trading margins also improved YoY and QoQ to USD 0.93/mmbtu (+456% YoY; +23% QoQ)

* Petrochemicals: Petchem, sales stood weaker at 109TMT (-21% YoY; -50% QoQ) on maintenance shutdown, but realization improved sequentially to Rs 133/kg; Revenue and Ebitda for the segment therefore stood at 14.4bn (+7% YoY ; -42% QoQ) and Rs 1.7bn (-34% YoY; -66% QoQ); weaker operating profit stemmed from lack of operating leverage and higher gas costs (raw material).

* LPG-LHC: Sales for the quarter stood at 220TMT (-12%YoY; +1% QoQ). The Revenue for the segment stood at Rs 14.05bn(+44% YoY +23% QoQ) , driven by higher LPG prices, Ebitda stood at Rs 6.6bn (+1% YoY; -12% QoQ).

Valuation

Maintain BUY rating on GAIL, with a revised Mar’23 TP of Rs 205/sh (from Rs 230/sh). Our SOTP based TP is a sum of a) stand-alone business valued at Rs 138/sh on DCF basis , b) Listed investment valued at Rs 34/sh and unlisted investments at Rs 35/sh.

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