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Strong earnings driven by gas trading business

GAIL’s 3QFY24 standalone EBITDA was INR 38.2bn, significantly higher than JMFe/consensus of INR 31.8bn/ INR 33.4bn due to continued stronger-than-expected gas trading EBITDA; further LPG and Petchem segment earnings was also better than expected while gas transmission earning was slightly lower than expected. Gas trading EBITDA was significantly higher at INR 20.7bn vs. JMFe of INR 13.8bn driven by further strengthening of competitiveness of GAIL’s US LNG vis-à-vis higher spot LNG prices during the quarter. Gas transmission EBITDA was lower at INR 15.6bn vs. JMFe of INR 16.8bn due to lower transmission EBITDA margin at INR 1,396/tcm on account of higher-than-expected gas cost due to further cut in APM allocation. We maintain BUY (revised TP of INR 175) on higher tariff and steady growth visibility in the gas transmission business on account of various policy tailwinds (given the government’s target to increase the share of gas in India’s energy mix to ~15% by 2030 vs. ~7% currently). At CMP, the stock trades at 1.6x FY26E P/B and 12.6x FY26E PE.

Earnings beat driven by continued strength in gas trading margins: GAIL’s 3QFY24 standalone EBITDA at INR 38.2bn is significantly higher than JMFe/consensus of INR 31.8bn/ INR 33.4bn due to continued stronger-than-expected gas trading EBITDA; further, LPG and Petchem segment earnings was also better than expected while gas transmission earning was slightly lower than expected. Hence, PAT at INR 28.4bn was also significantly higher than JMFe/consensus of INR 21.4bn/ INR 23.2bn aided by higher other income and lower taxes. Gas trading EBITDA was significantly higher at INR 20.7bn vs. JMFe of INR 13.8bn (and vs INR 19.5bn in 2QFY24) – this seems to be on account of further strengthening of competitiveness of its US LNG due to rise in spot LNG during the quarter. Hence, gas trading margin improved to INR 2,296/tcm in 3QFY24 vs. JMFe of INR 1,500/tcm (vs. INR 2,189/tcm in 2QFY24); however, volume was slightly lower than expected at 98.1mmscmd (vs. 97mmscmd in 2QFY24).

 Gas transmission EBITDA lower than expected due to higher cost on account of cut in APM gas allocation; volume largely in line: Gas transmission EBITDA was lower at INR 15.6bn vs. JMFe of INR 16.8bn (INR 16.5bn in 2QFY24) due to lower transmission EBITDA margin at INR 1,396/tcm vs. JMFe of INR 1,495/tcm, on account of higher-than-expected cost at INR 774/tcm (vs. INR 713/tcm in 2QFY24) due to further cut in APM gas allocation. However, transmission volume was largely in line at 121.5mmscmd (vs. 120.3mmscmd in 2QFY24). 

Petchem segment earnings recovered better than expected; LPG segment earnings was also higher than expected: Petchem segment earnings recovered better than expected as the segment reported EBITDA of +INR 2.1bn in 3QFY24 vs. JMFe of +INR 0.7bn (vs. negative INR 0.4bn in 2QFY24). Petchem sales volume was higher at 215ktpa or 106% utilisation vs. JMFe of 185ktpa (from 168ktpa in 2QFY24); further, EBITDA margin also improved significantly to +USD 115/tn (vs. negative USD 27/tn in 2QFY24) vs. JMFe of +USD 45/tn due to lower gas cost (of USD 8-9/mmbtu) as per the management. LPG & OHC segment EBITDA was also higher at INR 2.8bn vs. JMFe of INR 2.5bn as EBITDA

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