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We upgrade GAIL to BUY from Add due to the recent stock correction, and lower Sep-25E TP by 5% to Rs255. GAIL reported Q2FY25 SA EBITDA of Rs37.4bn, a 4% slip, mainly due to a 25% miss in gas marketing (lower margins) and 7% miss in transmission (higher opex), partly offset by better petchem and other segments. Management reiterated its transmission volume guidance of >130mmscmd in FY25 and 10-12mmscmd annual growth in FY26-27. Marketing margin guidance of >Rs45bn should also rise post-Q3FY25 results. Petchem should see reasonable profits with healthy utilization. We cut FY25E EPS by 10% to factor in the delay in pipeline tariff hike to FY26 and also trim FY26-27E EPS by 6% each on lower marketing income, petchem deltas, and LPG-LHC realization, due to a cut in our Brent assumption to USD80/bbl from USD85. We retain our target 7.5x EV/EBITDA multiple, given 20% EPS CAGR in FY25-26E.

Result Highlights

GAIL’s Q2FY25 SA EBITDA/PAT was Rs37.5/26.7bn, down 17%/2% QoQ, up 7%/11% YoY and 4% below/7% above our estimate. The book EBITDA miss was due to lower gas marketing and transmission EBITDA, with beat in Petchem and Others segments. The PAT beat was led by lower DA at Rs8.2bn – down 22% QoQ (included Rs2.34bn of oneoff in Q1) and slightly higher Other Income of Rs7.1bn – up 27% YoY. Gas transmission EBITDA fell 8% QoQ as volume grew 9% YoY/fell 1% QoQ to 130.6mmscmd. Average tariff fell 2% QoQ to Rs2.1/scm while opex was up. Gas marketing EBITDA declined 34% QoQ to Rs15.1bn in Q2 (a 25% miss) on weaker RLNG margins QoQ. Marketing volume fell 3% QoQ at 96.6mmscmd (a 4% miss). Petchem EBITDA recovered by 2.3x QoQ to Rs2.8bn. Pata utilization rose to 115% in Q2 after the shutdown in Q1. Realization premium to Korea improved to 13% in Q2 vs 11% QoQ. LPG-LHC EBITDA rose 4% QoQ to Rs2.8bn on better volumes, despite lower realizations. LPG-LHC production increased 17% QoQ. Capex stood at Rs18.9bn in Q2.

Management KTAs

Company has submitted documents for tariff revision to PNGRB 1.5 months back and the process is on with likely applicability from Apr-25-end. Prolonged monsoon and lower power sector demand affected marketing volumes QoQ in Q2. GAIL takes 10-15% of volumes from the spot market. It has secured 1.53mmtpa of term LNG from Vitol and ADNOC, starting CY26, with an aim to secure a total 7mmtpa by CY30. These are crude linked and USD0.5-1/mmbtu cheaper than Qatargas. Marketing margins should stabilize going ahead. The Usar Rs112.56bn 0.5mmtpa PDHPP project has achieved 75% progress and completion-commissioning is expected by Apr-Oct of next year. The Rs13bn Pata 60ktpa PP project is 91% complete and should be mechanically ready by Dec-24. It is looking at listing of 1-2 CGD JVs and an update on this is likely by Q3FY25. Dabhol would be an all-weather terminal by next monsoon with breakwater done by Feb-25. FY25 conservative/normative capex target is Rs80-90bn/>Rs100bn.

Valuation

We cut FY25E earnings by 10% to factor in the delay in transmission tariff hike to FY26 along with lower oil prices. We value GAIL on SOTP-EV/EBITDA-based methodology, with investments at 30% holdco discount. We retain our blended target multiple at 7.5x Sep26E EV/EBITDA. Key risks: Adverse commodity price and margins, currency fluctuations, regulations, outages and project delays.

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