Buy GAIL Ltd For Target Rs.255 by Motilal Oswal Financial Services Ltd
Weak trading mars 3Q
* GAIL’s 3QFY25 performance was significantly below our estimates, primarily due to weak gas marketing segment performance. While APAT came in 43% below our estimate, reported PAT was lifted by an exceptional income of INR24.4b booked during the quarter relating to the arbitration settlement with SEFE. Transmission volumes were weaker QoQ due to a decline in power sector demand in 3Q, while adverse spread movement on some of the gas contracts led to lower profitability on some of the marketing contracts. Overall, management expects transmission volumes to grow by ~10mmscmd in FY26 and remains hopeful of tariff hike approval for the transmission business in 1QFY26.
* Key takeaways from the earnings call:
* In 3Q, marketing margin declined by INR8-9b due to the following factors:
* Amid falling crude prices in early 3Q, a loss of INR2b was booked on a few contracts as per pricing terms. As per management, this loss will naturally reverse over a period of one year.
* Higher Henry Hub (HH) prices led to margin contractions, resulting in a loss of INR1.5b.
* GAIL had marketed ~2mmscmd of volumes in excess of volumes actually sourced, which were then covered via sourcing costly Spot LNG. This led to losses of INR4.5b.
* Transmission volumes are expected to be in the range of 129-130mmscmd in FY25 and grow by 10mmscmd p.a. going forward.
* 4QFY25 LPG production could drop by 75tmt due to APM de-allocation.
* A tariff hike is expected by Jun’25 (Mar’25 guided earlier).
* We reiterate BUY on GAIL with our SoTP-based TP of INR255, valuing:
* gas transmission business at 9x FY27E EBITDA of INR95b,
* LPG transmission business at 8x FY27E EBITDA of INR5b,
* gas trading business at 6x FY27E EBITDA of INR55b,
* petrochemical business at 7x FY27E EBITDA of INR28b, and
* LPG business at 6x FY27E EBITDA of INR19b.
* Adding the value of listed and unlisted investments of INR267b and adjusting FY27E ND of INR132b, we arrive at our revised TP of INR255.
Miss on estimates due to weak NG marketing performance
* In 3Q, EBITDA came in 25% below our est. at INR28.4b (down 26% YoY).
* The EBITDA miss was due to weak marketing margins in 3Q, as:
* Amid falling crude prices in early 3Q, a loss of INR2b was booked on a few contracts as per pricing terms. As per management, this loss will naturally reverse over a period of one year.
* Higher Henry Hub (HH) prices led to margin contractions, resulting in a loss of INR1.5b.
* GAIL had marketed ~2mmscmd of volumes in excess of volumes actually sourced, which were then covered via sourcing costly Spot LNG. This led to losses of INR4.5b
* While reported PAT came in at INR38.7b, an exceptional income of INR24.4b was booked in 3Q related to a settlement amount received for a pending arbitration proceeding against SEFE Marketing & Trading Singapore Pte Ltd. While other income also came in significantly above our estimate, the tax rate was lower than our estimate.
* Hence, adjusted PAT was down 50% YoY at INR14.3b (43% below our est.).
* Natural gas transmission volume was in line with our est. at 125.9mmscmd (up 4% QoQ).
* Petchem sales were also in line with our est. at 221tmt (flat YoY), while petchem segment reported EBIT of INR47m.
* While EBIT of the LPG transmission, LPG and LHC segments beat our estimates, EBIT of the gas transmission, adjusted NG marketing and petrochemical segments came in below our estimates.
* In 9MFY25, net sales/EBITDA grew 3%/12% to INR1015b/INR111b, whereas APAT was flat at INR68b.
* The board has declared an interim dividend of INR6.5/share (FV: INR10/share).
Valuation and view
* We reiterate our BUY rating on GAIL with a TP of INR255. During FY24-27, we estimate a 15% CAGR in PAT driven by:
* an increase in natural gas transmission volumes to 154mmscmd in FY27 from 120mmscmd in FY24;
* substantial improvement in petchem segment’s profitability over 2HFY25- FY27 as the new petchem capacity will be operational and spreads are bottoming out;
* healthy trading segment profitability with guided EBIT of at least INR45b.
* We expect RoE to improve to ~16% in FY26 from 9.5% in FY23, with a healthy FCF generation of INR81b in FY26 (vs. -INR45.3b in FY23), which we believe can support its valuations.
* Our SoTP-based TP includes:
* gas transmission business at 9x FY27E EBITDA of INR95b,
* LPG transmission business at 8x FY27E EBITDA of INR5b,
* gas trading business at 6x FY27E EBITDA of INR55b,
* petrochemical business at 7x FY27E EBITDA of INR28b, and
* LPG business at 6x FY27E EBITDA of INR19b.
* Adding the value of listed and unlisted investments of INR267b and adjusting FY27E ND of INR132b, we arrive at our revised TP of INR255.
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