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Gas trading & Petrochemicals drive the beat

Our view

The 3QFY22 operating profit at Rs 42.8bn (+120% YoY; +22% QoQ), stood above our and street estimates on stronger natural gas trading and petrochemical margins. Strong spot LNG prices environment, improved attractiveness for GAIL’s contracted LNG cargoes, helping the company score better marketing margins. Of the 22 US cargoes imported during the quarter, only 6 were sold outside India (vs 14 in 1Q and 8 in 2Q), As a result the trading margins also improved sharply to USD 0.76/mmbtu (2Q: USD 0.47/mmbtu; 1Q: USD 0.17/mmbtu). Going ahead the prognosis appears healthy as transmission and trading volumes are likely to improve further with full commissioning of Gorakhpur, Barauni and Sindri fertilizer plants over Apr-Dec’22. BUY with TP of Rs 250/sh.

Result Highlights

* 3QFY22 Profitability: Operating Profit and PAT stood at Rs 42.8bn (+120% YoY; +22% QoQ) and Rs 32.8bn (+121% YoY; 15% QoQ). While strong YoY growth primarily stemmed from weak base quarter, when Covid-1 st wave impacted earnings, the sequential improvement is on account of stronger profitability in natural gas trading and petrochemicals segment.

* NG Transmission: Gas transmission volume stood QoQ flat at 114.3mmscmd (2Q: 114.3mmscmd) as expected volume pick-up from newly commissioned fertilizer plants is now anticipated over FY23. The transmission volume is expected to improve by 5-6mmscmd in FY23, and at about ~5% p.a. thereafter.

* NG Trading: NG trading volume stood QoQ lower at 96.6mmscmd (1Q: 97.2mmscmd), on lower spot sales. GAIL imported 22 US cargoes during the quarter, of which just 6 were sold in overseas market (2Q: 8) on stronger domestic demand for cheaper contracted LNG (vs expensive spot LNG). High spot LNG prices bode well for GAIL’s US LNG import and NG trading margins improved further to USD 0.76/mmbtu (2Q: USD 0.47/mmbtu). Going ahead, while margins are expected to stay firm, but a moderation from 3Q levels can’t be ruled out.

* Petrochemicals: Petchem, sales was lower QoQ at 217TMT (2Q: 221 TMT) with profitability at Rs 3.6bn (-16% YoY; flat% QoQ), as lower sales were offset by improvement in PE realization to Rs 110/kg (2Q: Rs 103/kg).

* LPG-LHC: Segment profitability stood at Rs 8.5bn, higher by 25% QoQ, and 202% YoY on higher sales volume at 275TMT (2Q: 262TMT), and 28% QoQ & 101% YoY stronger LPG realizations.

Valuation

We maintain our BUY rating on GAIL with a Mar’23 TP of Rs 250/sh. In the longer run, a strong prognosis (7% CAGR over 2020-30) for consumption of natural gas in India, driven by CGD, Fertilizer and Industrial sectors is expected to have earnings accretive implications for GAIL.

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