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Muted Q4 FY22 performance; outlook steady

* GAIL’s Q4FY22 standalone EBITDA/PAT fell 12%/18% qoq to Rs37.1bn/Rs26.8bn and missed our estimates by 8%/15% with gas transmission, marketing, LPG-LHC and others segments’ earnings coming lower. Other income also fell 25% yoy to Rs4.2bn.

* Gas transmission EBITDA was down 8% qoq to Rs11.5bn, as volumes declined 6% to 107.6mmscmd. Marketing EBITDA was 1% lower at Rs17.8bn (15% miss), with volumes down 2% to 94.7mmscmd. RLNG portfolio margin was USD1.1/mmbtu, up 6% qoq.

* Petchem utilization was 97% on Pata shutdown. EBITDA was up 3% qoq to Rs5.0bn vs. Rs391mn est., as gas costs were lower. LPG & LHC EBITDA of Rs7.5bn was a 21% miss, as volumes fell 21% qoq. Others/unalloc. EBITDA loss was Rs1.5bn vs. +Rs3.3bn est.

* We cut FY23E/FY24E EPS by 15%/5% on lower marketing, petchem and LPG&LHC margins, partly offset by better transmission margins. We trim FY24 target EV/EBITDA to 5.4x from 5.5x (adjusting for higher CoE). Retain Buy with a revised Rs190 TP.

Highlights: Average transmission tariff rose 3% to Rs1.5/scm. LPG transmission EBITDA rose 5% qoq, with volumes and tariffs remaining largely flat. Petchem average realization rose 4% qoq (in-line) while opex was also higher, with the premium to Korea flat at 17% qoq. LPG&LHC production fell 24% qoq due to shutdown, while discount to Arab Gulf was at 8%. Tax rate was lower at 24% in Q4. For FY22, S/A EBITDA/PAT was Rs138/Rs104bn, up 2x+ each, driven by post-Covid commodity price rebound in most segments and much better gas marketing margins led by gas price volatility. Capex was Rs77.4bn. Board recommended final dividend of Rs1/sh (40%+ annual payout). Consol. EPS was up 2x yoy to Rs27.6

Guidance: AIL expects gas marketing volumes to see a 6-8% CAGR in the next 2-3 years and transmission 8-10%, driven by fertilizers, CGD and steel (1.5-2mmscmd initially). From June, GAIL expects growth in gas demand. Capex target for FY23 is Rs75bn, for pipelines (Rs50bn), followed by petchem/equity Rs7bn/Rs6bn. Urja Ganga will be fully commissioned by Jun’23, besides Barauni-Guwhati and Dhamra Haldia. Unified tariff should come, but it depends on the regulator’s decision. Q4 volumes were impacted by Omicron and plant shutdowns. Gas marketing to clock Rs20-25bn of floor EBITDA in FY23, with Henry Hub linkages. Propane for the new Usar plant will be sourced from the Middle East, with an annual need of 0.6mmtpa. The new Pata and Usar petchem units will be commissioned by Jan’24 and Apr’25, respectively. GAIL is unlikely to face any potential windfall taxes due to its largely regulated business model.

Valuation: We value GAIL on an SoTP basis with a 5.4x blended target Mar’24E EV/EBITDA for the standalone business and investments at a 30% holdco discount. Key risks: adverse commodity prices-margins, currency, regulations and outages.

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