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QoQ performance improvement continues

During Q2, GAIL once again reported strong improvement in operating performance after improvement seen in Q1. EBITDA surged 34.6% QoQ at Rs35.8bn vs Rs26.6bn. The robust performance was supported by rising gas transmission volumes and gas marketing margins. Natural gas transmission volumes rose 3.4% QoQ and 11.7%YoY at 120.3mmscmd. Natural gas sales dipped 1.9% QoQ at 97.0mmscmd vs 98.8mmscmd, however margin surge led to 64.7% QoQ jump in EBIT at Rs17.2bn. Petrochemicals sales rose 3.7% QoQ to 168,000MT vs 162,000MT. Operating performance improvement led to almost doubling the bottom-line QoQ at Rs20.5bn (excl. share of profit from asso./ JVs). GAIL’s capex in Q2 stood at ~Rs25bn spread across the segments. Management guided robust growth in gas transmission volumes with average volumes of 132-133mmscmd in FY25E. Based on 1H performance and strong management guidance, we have upped our FY24E/ FY25E EBITDA estimates by 24%/ 36%. Introducing FY26E estimates and rolling over valuations to 1HFY26E, we upgrade the stock from Reduce to Add with a SOTP based revised TP to Rs131 (earlier Rs115).

Gas transmission volumes further improve QoQ

During Q2FY24, GAIL’s natural gas transmission volumes rose 3.4% QoQ and 11.7% YoY at 120.3mmscmd. Increased volumes and rise in tariffs led to 26.0% YoY jump in EBIT at Rs12.9bn. Though, natural gas marketing volumes were lower QoQ at 97.0mmscmd, robust margins led to 64.7% surge in EBIT at Rs17.2bn. LPG transmission volumes rose 3.8% QoQ and 1.3% YoY. Petrochemicals segment pain continued albeit at lowered a bit with EBIT losses reducing QoQ from Rs3.0bn to Rs1.6bn, volumes nonethelessrose 3.7% QoQ.

Capexes and rising utilisation to drive growth

In Q2, GAIL’s gas transmission pipeline capacity utilisation stood at 58% rising QoQ due to increased demand in domestic market. Petrochemical capacity utilisation remained muted at 69% due to demand related challenges. LHC and LPG transmission capacity utilisation stood at 67%and 97% respectively. GAIL invested ~Rs25bn in Q2 across pipelines, petchem projects, operational capex etc., taking the total capex in 1H at ~Rs49bn. FY24E capex is likely to surpass guidance of Rs77.5bn

Strong performance and guidance leads to estimates and reco upgrade

Management remains upbeat on improvement in overall operational performance over the next couple of years buoyed by better demand and margins aided by ongoing capexes on transmission pipelines. GAIL guided FY24E/ FY25E natural gas transmission volumes at 120mmscmd/ 132-133mmscmd vs 107mmscmd in FY23. It expects to get 1mmt LNG every year over the next few years thus benefitting its gas marketing segment growth. Petchem still remains a concern for near term however the company has been able to reduce its losses by optimising input gas costs. Based on 1H performance and strong management guidance, we have upped our FY24E/ FY25E EBITDA estimates by 24%/ 36%. Based on our revised estimates, the stock is currently trading at 7.9x/ 5.9x FY24E/ FY25E EV/ EBITDA. Rolling over our valuations to 1HFY26E, we upgrade the stock from Reduce to Add with a SOTP based revised TP of Rs131 (Rs115).

Risks – Slower recovery in petchem margins, volume impact due to increase in crude and natural gas prices

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