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One-offs mar 4QFY24; robust guidance maintained

 * GAIL reported an EBITDA of INR36b in 4QFY24, 4% below our estimate, even as PAT came in 19% below our estimate. The miss was due to a weakerthan-expected performance in the trading segment, a one-off depreciation- related charge of INR1.7b, and lower-than-expected other income. This was partly offset by a strong performance in the petchem and LPG segments, with EBIT coming ahead of our expectations.

* GAIL anticipates a robust domestic gas demand, projecting gas transmission volumes to reach 132mmscmd by end-FY25 and 142mmscmd by end-FY26. For the trading segment, management guided an EBIT of INR40-45b, while for the petchem segment, it remained hopeful of a healthy FY25 profitability amid weaker spot LNG prices.

* The key takeaways from the analyst meet: 1) the quality of guidance has significantly improved and GAIL remains on track to achieve the guided volumes and profitability in transmission and trading, 2) the strength of improvement in petchem profitability has surprised us/street, and 3) key projects such as PDH-PP remain on track for completion as per timelines.  

* We value the core business at 13x FY26E adj. EPS of INR15. Adding the value of listed and unlisted investments of INR40, we arrive at a TP of INR235. Reiterate BUY

Miss due to a weaker-than-estimated trading performance and one-offs

* EBITDA came in 4% lower than our estimate at INR35.6b (our est. of INR36.9b, 11.6x YoY).

* The miss was due to weaker-than-expected performances in the gas transmission and trading segments, partially offset by better-than-expected performance in the Petchem, LPG, and Liq. HC segments.

* PAT was 19% below our est. at INR21.8b (est. of INR27b, 3.6x YoY), mainly due to lower other income and higher DDA in 4QFY24.

* Natural gas transmission volume stood at 123.7mmscm (vs. our est. of 128.4mmscm; 121.5mmscm in 3QFY24).

* Gas marketing volume stood at 99.9mmscm (vs. 98.1mmscm in 3QFY24).

* LHC sales rose 5% YoY to 261 TMT (vs. 249tmt in 3QFY24) & Polymer sales jumped 13% YoY to 242tmt (vs. our est. of 216.4mmscm; 215mmscm in 3Q).

* During FY24, GAIL’s revenue stood at INR1.3t (-9% YoY). EBITDA was INR133b (+99% YoY), while PAT stood at INR88.4b (+67% YoY).  

* The residual value of Natural Gas/LPG/CGD pipelines has been revised to 'NIL', resulting in an additional depreciation of INR1.7b in 4QFY24.  

Segmental EBIT details for the quarter

* Gas transmission business posted an EBIT of INR9.8b (vs. loss of INR164m in 4QFY23).

* LPG transmission EBIT stood at INR756m (-5% YoY).

* Trading business posted an EBIT of INR13.9b (vs. EBIT of INR4.9b in 4QFY23).

* Petchem segment posted an EBIT of INR2.6b (vs. a loss of INR4b in 4QFY23).

* LPG and HC reported an EBIT of INR3.3b (vs. EBIT of INR1.2b in 4QFY23). 

Valuation and view

* We reiterate our BUY rating on GAIL with a TP of INR235. During FY24-26E, we are modeling PAT to report a 10% CAGR driven by:

* Rising natural gas transmission volumes to 142mmscmd in FY26 from 120mmscmd in FY24;

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

* Healthy trading segment profitability with EBIT guided at INR40-45b.  

* We expect GAIL’s ROE to improve to ~15% in FY26 from 9.5% in FY23, with healthy FCF generation of INR44b in FY26 (vs. -INR45.3b in FY23), which we believe can drive a re-rating for the stock. 

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