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Natural Gas trading disappoints; PBT in line, supported by lower depreciation

GAIL's Q2 FY25 performance was a mix bag, with EBITDA/PAT at Rs37.5bn/Rs26.7bn, up 7.3%/11.1% YoY, EBITDA missing expectations on poor gas trading performance. Natural Gas transmission was in line on better volumes and margins. Petchem reported a positive surprise while other segments were in line to our expectations. The management guidance on volume growth for NG transmission segment annually at 10-12mmscmd for next 2-3year and gas trading EBITDA over Rs 45bn creates a bullish sentiment and given the stock price has corrected significantly, we maintain our rating of ADD, with a revised 12-mth TP to Rs240 (vs 272 earlier).

Result Highlights

* Performance: GAIL’s Q2FY25 EBITDA/ PAT were Rs37.5bn/Rs26.7bn, up 7.3%/11.1% YoY but down 17.3%/1.9% QoQ. EBITDA was lower than our estimate of Rs41.3 on weaker NG trading volumes & margins while PAT was marginally higher than ours of 25.6bn on lower-than-expected depreciation. The overall performance was largely driven by NG transmission offsetting poor trading performance, Petchem was marginally better than our expectations.

* Gas transmission volumes were in line with our expectation at 130.6mmscmd, up 10.3mmscmd YoY, down 1.2mmscmd QoQ, Gas capacity utilisation (pipelines) was ~62.2%. Revenue was Rs2,368/tscm (down 0.9% YoY and QoQ). Opex/unit was in line with our expectations. The segment gross margins at Rs 1,503/tscm was up 0.8% YoY but down 8.3% QoQ on muted volumes.

* LPG transmission volumes were 1,124 (‘000 mt), up 0.9% YoY and 5.5% QoQ. Revenue/ton was Rs1,651, flat YoY but down 2.2% QoQ, while the gross margin/ton was Rs934 (flat YoY & QoQ).

* Gas trading volumes were 96.6mmscmd, down YoY by 0.4mmsmcd and by 2.9mmsmcd QoQ. The margin was subdued at Rs1,701/tscm (Rs2,524 the prior quarter and Rs2,189 a year ago). The performance was weaker than our expectations on higher gas costs and possibility poor contracted basket.

* Petchem production was up 46.3% YoY and 44.4% QoQ, to 234 (‘000 mt). The realisation was down 7.2% YoY and flat QoQ, gross margin at Rs 2.8bn was better as the gas got cheaper on YoY basis.

* LPG and LHC. Sales volumes were up 4.5% YoY and 16.1% QoQ; while the realisation was up 19.9% YoY but down 4.6% QoQ. CGD segment. The CGD revenue/EBIT at Rs bn 34.1/2.1 up 15%/120.3% YoY and 5.7%/8.8% QoQ.

* Capex. The company has incurred Rs18.9bn (Rs 35.44bn in H1FY25), FY25 is targeted at Rs80-90bn, mainly on pipelines, petrochemicals, equity to JVs, etc.

* H1FY25 Performance: GAIL’s FY24 EBITDA/ PAT were Rs82.7bn/Rs54bn, vs Rs59.2bn/Rs38.2bn in in H1FY24. OCF stood at Rs75.7bn up 2.1% from Rs74.2bn last year. NG transmission volumes were 131.2mmscmd up 10.9% YoY, LPG transmission volumes stood flat at 2,189mmt, NG trading volumes were flat too at 98mmsmcd whereas petchem volumes were up 19.7% reaching 395tmt while LPG & LHC volumes declined by 3.7% to 471tmt.

Valuation

We believe GAIL’s EBITDA to record a 9% CAGR over FY24-27e led by a 12.3% CAGR in gas transmission EBITDA. The gas transmission business has bright prospects (currently contributing ~58% to EBITDA in FY27e, expected to increase further) while the commodity business is a little volatile. The stock recently corrected sharply, we maintain our rating of ADD with a revised TP of Rs240 (vs 272 earlier), valuing it on a sum-of-parts basis (core business at Rs208, 9.4x EV/EBITDA and investments at Rs32).

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