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Robust performance fueled by turnaround in petchem segment

* GAIL reported EBITDA of INR38.2b in 3QFY24, 10% above our estimate of INR34.7b. It was driven by stronger-than-expected performances in the gas transmission, LPG, and petchem segments. PAT stood at INR28.4b, beating our estimate of INR24.2b (up 12x YoY).

* Management emphasized that improved realization fueled a strong performance in the Liquid Hydrocarbon segment. Additionally, higher petrochemical sales, improved marketing margins, and reduced costs in the petrochemical segment contributed to an overall robust performance.

* GAIL anticipates a robust domestic gas demand, projecting gas transmission volumes to reach 124mmscmd by end-FY24. Forecasts indicate a continued annual growth of 10-12% in volumes for FY25-26, with projected figures of 133mmscmd for FY25 and 141mmscmd for FY26 in the segment.

* Management highlighted that the optimal cost for the petrochemical segment is USD8-9/mmBtu, and the company currently procures and supplies at this rate to the PATA petrochemical plant. The segment's utilization level is at 101%, and no shutdown is anticipated for the PATA plant in the near future.

* We value the core business at 12x Dec’25E adjusted EPS of INR14.1. Adding the value of listed and unlisted investments of INR31, we arrive at our TP of INR200. Reiterate BUY.

Beat led by transmission and LPG segments coupled with a turnaround in the petchem segment

* EBITDA came in 10% higher than our estimate at INR38.2b (our est. of INR34.7b, 15x YoY).

* The beat was driven by better-than-expected performances in the gas transmission, LPG and petchem segments.

* PAT was 18% higher than our est. at INR28.4b (est. of INR24.2b, 12x YoY). ? For 9MFY24, GAIL’s revenue stood at INR983b (-12% YoY). EBITDA was at INR97.5b (+52% YoY), while PAT stood at INR66.6b (+42% YoY).

* GAIL’s 1HFY24 EBITDA was 55% of our full-year estimate.

* The Board declared an interim dividend of INR5.50/share.

* As of Dec’23, the company had a deficit of INR431m post-settlement in terms of Regulation of Schedule D of Tariff Regulations.

* This pertains to the difference between UFT and the ‘Integrated Tariff’ that has to be settled between entities through the Settlement Committee on a fortnightly basis.

Segmental EBIT details for 3QFY24

* Gas transmission business reported EBIT of INR12.2b (est. INR11.3b).

* LPG transmission EBIT was at INR794m (-13% YoY).

* Trading business posted an EBIT of INR18.8b (vs. loss of INR860b in 3QFY23).

* Petchem segment posted an EBIT of INR619m (vs. loss of INR3.5b in 3QFY23).

* LPG and HC reported an EBIT of INR2.6b (vs. loss of INR292m in 3QFY23

Valuation and view

* We reiterate our BUY rating on GAIL and raise our TP to INR200. During FY23- 26E, we are modeling the EBITDA to report a 33% CAGR driven by:

* Rising natural gas transmission volumes to 141mmscmd in FY26 from 107mmscmd in FY23;

* Substantial improvement in petchem segment’s profitability over 2HFY25- FY26, as the new petchem capacity will be operational and low inventories globally will drive re-stocking demand; and

* Commencement of operations of 3,892km of gas transmission pipelines and 560ktpa of petchem capacity.

* We expect GAIL’s RoE to improve to ~15% in FY26 from 9.5% in FY23 with a healthy FCF generation of INR49.4b in FY26 (vs. -INR45.3b in FY23). This, we believe, can drive a re-rating for the stock.

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