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Gas trading segment continues to drive earnings

About the stock:Gail India is a gas utility company with various business segments such as gas transmission & trading, LPG, LLH and petrochemicals.

* It operates a natural gas pipeline network of 14500 km as of end of FY22

* Gail also has a presence in CGD sector directly and via associate companies

Q1FY23 Results: Results were better-than-expected on account of higher profitability in the gas trading segment.

* Revenue was up 116.1% YoY to | 37562.5 crore due to higher realisation

* While gas transmission and petchem segment performance was weaker than anticipated, other segments- gas trading and LPG/LLH reported better than expected profit

* Subsequently, EBITDA was | 4365.7 crore, up 81.1% YoY (our estimate: | 3009.2 crore). Reported PAT was at | 2915.2 crore, up 90.5% YoY (our estimate: | 2017.1 crore)

What should investors do? The gas trading outlook remains positive in the near term taking into account current LNG price trend that will offset weakness in transmission/trading and petchem volume trend.

* We maintain our BUY rating on the stock

Target Price and Valuation: We value Gail at | 160/share based on SoTP method

Key triggers for future price performance:

* Pick-up in gas transmission volume

* Gas trading is expected to report healthy gains in the near term due to favourable spot LNG prices

* Consistent dividend payout

Alternate Stock Idea: Apart from Gail, in our oil & gas coverage we also like IGL.

* Indraprastha Gas (IGL) is one of India’s leading CGD companies, which primarily operates in NCT of Delhi and will benefit from stricter environmental regulations in Delhi. Continued capex, newer areas and CNG conversion of vehicles will support further volume growth

* BUY with a target price of | 440

Q1FY23 Results: Better realisation drives revenue

* Revenue was up 39.3% QoQ on account of better realisation

* Gas transmission volumes increased 1.7% YoY, 1.8% QoQ to 109.5 mmscmd against our estimate of 111 mmscmd. Gas transmission EBIT at | 800.5 crore, below our estimate of | 903.7 crore due to higher-thanexpected costs

* On the gas trading front, volumes were at 100.8 mmscmd, up 5.1% YoY and 6.5% QoQ, above our estimate of 97 mmscmd. Gas trading EBIT of | 2314.5 crore was sharply higher than our estimate of | 990.8 crore amid better marketing spread

* Petchem segment reported volumes at 109 KT, below our estimate of 160 KT. EBIT was at | 35.2 crore lower than our estimate of | 241.4 crore due to higher-than-expected costs and lower-than-expected volumes. LPG, LLH volumes were at 220 KT, below our estimate of 240 KT. Lower than expected cost and higher realisation led to EBIT at | 634.9 crore, above our estimate of | 532.9 crore

Q1FY23 Conference call highlights

* The management said that of the 14 MMTPA LNG contract, 2.5 MMTPA comes from Gazprom. However, supply disruption was seen from May onwards. This is affecting transmission and trading volume

* Gail is supplying gas to its customers at take or pay level. Currently, transmission volume is reduced by –7.5 mmscmd while trading volume is lower by 5-6 mmscmd. The company has reduced its internal consumption for petchem segment while petchem segment is currently operating at 50% capacity

* Capex during the quarter was | 1975 crore. Planned capex for FY23 is | 7500 crore

* The management said that Gail Gas volume was 6 mmscmd in Q1FY23

* The company is exploring options for new gas contracts. The management said that short-term gas contracts are not available at the desired price

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