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Strong performance driven by Natural Gas trading and LPG & LHC segment

Our View

The resilient performance in Q3FY24 showcased GAIL's strength, with EBITDA/PAT soaring to Rs 38.2bn/Rs 28.4bn, up 14x/11x YoY, exceeding expectations. The standout performers were Natural Gas trading and LPG/LHC segments, while the unexpected EBIT profit in Petchem added to the positive narrative. We give GAIL an ADD rating, with a revised 12-mth TP of Rs177 (vs 166 earlier).

Result Highlights

* Performance: GAIL’s Q3FY24 EBITDA/ PAT were Rs38.2bn/Rs28.4bn, up 14x/11x YoY and 9%/18% QoQ (higher than our Rs 35.2/23 and consensus estimates: Rs33.4bn/Rs23.8bn). The strong performance was largely driven by a NG trading and LPG and LHC segment, while Petchem reported an EBIT profit versus our expectation of a loss.

* Gas transmission volumes were lower than our expectation at 121.5mmscmd, up 17.8mmscmd YoY, 1.2mmscmd QoQ. Gas capacity utilisation (pipelines) was ~58%. Revenue was Rs2,393/tscm (up 38% YoY and flat QoQ). Opex/unit was higher YoY due to there being no allocated APM gas. The segment gross margins at Rs 1,396/tscm was up 84% YoY down 6% QoQ on higher volumes and unified tariff implementation which resulted in an increase in the tariff.

* LPG transmission volumes were 1,095 (‘000 mt), down 1% YoY, 2% QoQ. Revenue/ton was Rs1,679, up 3% YoY and 1% QoQ, while the gross margin/ton was Rs922 (down 6% YoY, 1% QoQ).

* Gas trading volumes were 98.1mmscmd, higher YoY by 8.3mmsmcd and 1.2mmsmcd QoQ. The margin was stronger at Rs2,296/tscm (Rs2,189 the prior quarter and just Rs4 a year ago). The performance was better than our expectations on falling gas prices and better contracted basket.

* Petchem production was up 2x YoY and 28% QoQ, to 205 (‘000 mt). The realisation was down 17% YoY and 8% QoQ despite the gas got cheaper while the utilisation was ~93%.

* LPG and LHC. Sales volumes were flat YoY and up 3% QoQ; realisation was lower by 5% YoY but up 22% QoQ.

* CGD segment. The CGD revenue/EBIT at Rs bn 33.9/1.83 up 20%/55% YoY and 14%/97% QoQ.

* Capex. As per PPAC, the company has incurred Rs18.8bn (Rs63.7bn capex in 9MFY24); FY24 target: Rs77.5bn) mainly on pipelines, petrochemicals, equity to JVs, etc.

Valuation

We believe GAIL’s EBITDA to record a 29% CAGR over FY23-26e led by a 36% CAGR in gas transmission EBITDA. The gas transmission business has bright prospects (currently contributing ~54% to EBITDA in FY26e, expected to increase further) while the commodity business is a little volatile. Given the recent rally in the stock price and per our valuation, we maintain an ADD rating on the stock with a revised TP of Rs177 (vs 166 earlier), valuing it on a sum-of-parts basis (core business at Rs146, 7.7x EV/EBITDA and investments at Rs31).

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