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GAIL reported stark improvement in sequential operating performance with EBITDA up 3.8x QoQ at Rs26.6bn. Natural gas transmission volumes rose 7.5% QoQ at 116.3mmscmd vs 108.2mmscmd driven by higher RLNG sales. Natural gas sales too increased 2.5% QoQ at 98.8mmscmd vs 96.5mmscmd. Petrochemicals sales surged substantially by 37.3% QoQ at 162,000MT vs 118,000MT. EBITDA jump was attributable to increased gas transmission and marketing volumes coupled with higher transmission tariff realisation. Improvement in operating performance trickled down to bottom-line which rose 1.8x QoQ at Rs17.9bn. During Q1, GAIL incurred capex of Rs24bn and guided for ~Rs75bn capex for FY24E. Management remained upbeat on gas transmission segment and guided gas transmission volume of 123mmscmd by end- FY24E and 138-140mmscmd by end-FY25E. Based on Q1 performance and management guidance, we have upped our FY24E/ FY25E EBITDA estimate by 8%/ 10%. We maintain our Reduce rating with a SOTP based revised TP to Rs115 (earlier Rs105).

Strong QoQ recovery in gas transmission elevates Q1 performance

During Q1FY24, GAIL’s natural gas transmission volumes rose 7.5% QoQ and 6.3% YoY at 116.3mmscmd. Higher volumes coupled with revision in tariff led to 28% YoY surge in EBIT at Rs10.2bn. Natural gas marketing volumes too increased 2.5% QoQ at 98.8mmscmd, however remained lower by 2.0% YoY. Higher marketing margin led to segment EBIT almost doubling QoQ at Rs10.1bn. LPG and liq. Hydrocarbons volumes rose 7.4% QoQ while EBIT increased 65% QoQ at Rs2.0bn. Petrochemicals segment is still reeling under pressure, however EBIT losses reduced QoQ while volumes rose 37.3% QoQ.

Enough headroom for volume growth

During Q1, GAIL’s gas transmission segment operated at 56% capacity utilisation, while petrochemicals/ LHC/ LPG transmission capacity utilisation stood at 82%/ 69%/ 94%. LPG transmission segment capacity augmented with expansion of Jamnagar–Loni pipeline. GAIL invested Rs23.9bn in capex during Q1 with annual capex budget of Rs77.5bn. Management informed that GAIL has been authorised to build Gurdaspur-Jammu natural gas pipeline with a length of 160km at a capex of Rs5.2bn.

Robust gas transmission guidance

GAIL guided natural gas transmission volumes to touch 123mmscmd/ 138-140mmscmd by end-FY24E/ end-FY25E vs 107mmscmd in FY23. In gas marketing segment, the company plans to tie-up for 7-8mmtpa long-term supplies in staggered manner with 1- 2mmtpa per country to mitigate risks. GAIL’s operational performance is expected to improve hereon and we have revised our estimates based on Q1 performance and management outlook. The stock is currently trading at 11.9x/ 8.8x FY24E/ FY25E EV/ EBITDA. Based on our revised estimates, we continue to maintain Reduce rating with a SOTP based revised TP of Rs115 (Rs105).

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