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Topline soars; PAT up 131% YoY

GAIL India is a Government of India undertaking. The company processes and distributes natural gas and liquefied petroleum.

* Standalone revenue rose 57.7% YoY (+23.7% QoQ) to Rs. 21,515cr in Q2FY22, aided by strong growth across all segments.

* EBITDA margin rose 640bps YoY to 16.2% aided by steady growth in gas prices leading to improved spreads, along with better prices and higher operational efficiencies in the petrochemicals business. As a result, reported PAT surged 130.9% YoY (+87.1% QoQ).

* Company received its first LNG shipment from Russian firm Gazprom recently under its 20-year long-term contract at prices set to be cheaper than other foreign sources of gas for the country. 

* Profitability set to improve further with GAIL set to continue to benefit from hike in gas prices over the short term. We reiterate our BUY rating on the stock with a revised target price of Rs. 208 based on SOTP.

Robust all-round performance; significant gains in margin

During Q2FY22, company’s standalone revenue rose 57.7% YoY to Rs. 21,515cr (+23.7% QoQ) as it benefited from strong performance across all its segments, thereby registering significant gains owing to hike in gas prices in the international markets and higher sales of RLNG within India. Gas demand in the domestic market improved to 114.32 mmscmd (vs. 107.6 mmscmd in Q1FY22), while the production utilization levels improved to 55% (vs. 52%). Company reported stellar gains in gas transmission business as well, led by higher average price realizations for both Petrochemical (PC) and Liquid Hydrocarbon (LHC), with LPG transmission utilisation rate of 110% for the quarter. Owing to significant physical operational performance, EBITDA recorded a growth of 159.7% (+44.1% QoQ) reaching Rs. 3,475cr, with EBITDA margin improving 640bps YoY to 16.2%. Resultantly, PAT rose 130.9% YoY to Rs. 2,863cr (+87.1% QoQ), further helped by higher other income.

Key concall highlights

* H1FY22 capex spends stood at Rs. 3,180cr, with FY22 guidance at ~Rs. 6,600cr.

* City gas distribution (CGD) business turned profitable during the quarter, with gas being supplied to 81 CNG stations.

* Company is evaluating plans to set up country’s largest green hydrogen plant with a 10MW capacity and has identified 2-3 sites for the unit. It has also thereafter floated a tender for an electrolyser for the plant.

LNG prices to aid profitability in the coming months

Management remains confident of sustaining EBITDA margin performance in the gas marketing business at current levels in the coming months, as domestic consumption remains on a steady increase. With LNG prices hovering around $30 MMBtu in the international market and set to rise further, GAIL will continue to see better spreads in this segment, thereby translating to higher profitability.

Valuation

Company recently received the first shipment under its long-term deal with Gazprom for LNG, with prices that are cheaper than other deals currently in place with foreign sources. With a good monsoon for the year, demand from fertilizer manufacturers is expected to remain high in the coming months. With domestic retail demand also on the rise, we expect GAIL to deliver significant performance in the coming quarters. We estimate PAT to grow at 25.3% FY21-23E CAGR and reiterate our BUY rating on the stock with a revised target price of Rs. 208 based on our SOTP valuation.

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