Buy GAIL India Ltd For Target Rs 140 - Motilal Oswal Financial Services
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Petrochemical segment remains a pain point
* GAIL reported EBITDA of INR34.9b in 2QFY24, 54% above our estimate of INR22.7b. It was driven by a stronger-than-expected performance in the gas transmission, trading and petchem segments.
* Domestic gas demand remains strong and GAIL expects gas transmission volumes to rise up to 124mmscmd by FY24 end. It also expects volumes to grow up to 132mmscmd in FY25.
* The deallocation of domestic gas for use in compressors has adversely impacted GAIL by INR12b on an NPV basis. However, it has already notified the issue to PNGRB and expects to recover the amount in subsequent tariff revisions.
* The petchem segment reported an EBIT loss for the fifth consecutive quarter, but it narrowed to INR1.6b in 2QFY24 from INR3b in 1QFY24 due to cost optimization measures. In our view, the petchem segment’s profitability will be a key concern amid a weak petchem pricing environment.
* We value the core business at 10x FY25E adjusted EPS of INR11.7. Adding the value of listed and unlisted investments of INR23, we arrive at a TP of INR140/share. Maintain BUY
Strong performance in gas transmission, trading and petchem drives beat
* EBITDA jumped 98% YoY to INR34.9b, 54% above our estimate of INR22.7b.
* It was driven by a better-than-expected performance in the gas transmission, trading and petchem segments.
* PAT grew 56% YoY to INR24b, beating our estimate of INR15.6b by 54%.
* For 1HFY24, revenue stood at INR640b (-16% YoY), EBITDA at INR59b (-3% YoY) and PAT at INR38b (-14% YoY).
* 1HFY24 EBITDA was at 55% of our full-year estimate.
* As of Sep’23, the company has a deficit of INR804m after the settlement in terms of Regulation of Schedule D of Tariff Regulations.
* This pertains to the difference between UFT and ‘Integrated Tariff’ that has to be settled between entities through a settlement committee on a fortnightly basis
Segmental EBIT details for 2QFY24
* Gas transmission business reported EBIT of INR12.9b (est. INR10b).
* LPG transmission EBIT was in line at INR819m (-28% YoY).
* Trading business reported EBIT of INR17.8b (vs. INR3.6b in 2QFY23).
* Petchem segment posted an operating loss of INR1.6b (vs. INR3.5b loss in 2QFY23).
* LPG and HC reported an operating loss of INR167m (vs. EBIT of INR5b in 2QFY23).
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