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Earnings miss due to normalisation of gas trading margin

GAIL’s 2QFY25 standalone EBITDA was lower at INR 37.5bn vs. JMFe/consensus of INR 42.2bn/ INR 40.3bn primarily due to lower-than-expected EBITDA from the gas trading segment; it was also partly driven by slightly lower gas transmission EBITDA. Petchem segment EBITDA was largely in line as marginally lower sales volume was offset by robust margin. Further, LPG & OHC segment EBITDA was also largely in line with slightly higher sales volume offsetting marginally lower margin. LPG pipeline segment EBITDA was steady as expected. We maintain BUY (revised TP of INR 250) on steady growth visibility in the gas transmission business on account of higher tariff and 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 FY27E P/B and 10.9x FY27E P/E.

* Gas trading EBITDA normalises to INR 15.1bn due to moderation in margin and lower volumes: GAIL’s 2QFY25 standalone EBITDA lower at INR 37.5bn vs. JMFe/consensus of INR 42.2bn/ INR 40.3bn primarily due to lower-than-expected EBITDA from the gas trading segment; it was also partly driven by slightly lower gas transmission EBITDA. However, PAT was higher at INR 26.7bn vs. JMFe/consensus of INR 26.3bn/ INR 25.5bn due to lower depreciation (at INR 8.2bn vs. INR 10.5bn in 1QFY25), higher other income (at INR 7.1bn vs. JMFe of INR 5.8bn) and slightly lower taxes (at 22.6% vs. JMFe of 25.2%). Gas trading EBITDA normalised to INR 15.1bn vs. JMFe of INR 20.5bn (and from record high EBITDA of INR 22.9bn in 1QFY25) – this seems to be on account of moderation in margin to INR 1,701/tcm in 2QFY25 (vs. JMFe of INR 2,250/tcm and vs. INR 2,524/tcm in 1QFY25) and lower volume at 96.6 mmscmd (vs. 99.5mmscmd in 1QFY25).

* Gas transmission EBITDA 6% below JMFe on higher gas cost; however, volume was better than expected: Gas transmission EBITDA was 6% below JMFe at INR 18.1bn vs. JMFe of INR 19.2bn (INR 19.7bn in 1QFY25) due to lower transmission EBITDA margin at INR 1,503/tcm vs. JMFe of INR 1,640/tcm, primarily due to higher cost at INR 631/tcm vs. JMFe of INR 540/tcm (mostly due to higher gas cost for system use gas on account of high spot LNG price). However, transmission volume was stronger than expected at 130.6mmscmd vs. JMFe of 127mmscmd (vs. 131.8mmscmd in 1QFY25) despite moderation in gas demand from the power sector.

* Petchem and other segment earnings were largely in line: Petchem segment EBITDA was largely in line at INR 2.8bn in 2QFY25. Petchem sales volume was only a tad lower at 226ktpa vs. JMFe of 240ktpa (vs. 169ktpa in 1QFY25); however, EBITDA margin was robust as expected at +USD 148/tn (vs. +USD 88/tn in 1QFY25) vs. JMFe of +USD 156/tn. LPG & OHC segment EBITDA was also in line at INR 2.8bn with EBITDA margin slightly lower at USD 131/tn (vs. USD 146/tn in 1QFY25) while sales volume was a tad higher at 252kt (vs. JMFe of 250kt). LPG pipeline segment EBITDA was steady as expected at INR 1bn.

*  Maintain BUY on steady growth visibility in gas transmission business: We maintain our FY25-FY27 estimates; however, our TP has been revised to INR 250 (from INR 255) due to decline in value of other investments (which is valued at CMP less 20% holding discount). We reiterate BUY due to steady growth visibility in the gas transmission business, coupled with higher tariff, 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). Our TP comprises: a) core business value of INR 208/share; b) other investments at INR 53/share; and c) net debt of INR 11/share. At CMP, the stock trades at 1.6x FY27E P/B and 10.9x FY27E P/E. Key risks: a) sharp weakness in crude/spot LNG and/or jump in US HH gas price posing risk to US LNG margin; b) slow recovery in domestic gas demand impacting volume for gas transmission and trading segment.

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