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GAIL’s robust Q3 performance was buoyed by continued margin expansion in natural gas marketing coupled with positive EBIT contribution from petrochemicals and liq. hydrocarbons segment. Thus, GAIL reported 17.5% QoQ jump in EBITDA at Rs42.1bn vs Rs35.8bn. Natural gas transmission volumes rose 1.0% QoQ at 121.5mmscmd while natural gas sales rose 1.2% QoQ at 98.1mmscmd. The company operated its petrochemicals plant at 101% capacity utilisation thus turning the performance into positive EBIT contribution from EBIT loss in Q2. Management guided gas transmission exit rate at 123-124mmscmd for FY24E and 12-15mmscmd addition over the next couple of years. Although gas marketing margin is expected to be ~Rs55bn+ in FY24E, management guided for a min. of Rs40bn margin in FY25E with upside potential. Based on 9MFY24 performance and latest guidance, we have raised our FY24E/ FY25E EBITDA estimates by 14.7%/ 0.9% while lowering FY26E EBITDA estimate marginally by 1.7%. The stock has surged ~43% over the past three months. We downgrade the stock from Add to Sell with a SOTP based revised TP to Rs140 (earlier Rs131).

Gas transmission volumes rise QoQ

During Q3FY24, GAIL’s natural gas transmission volumes increased 1.0% QoQ and 17.2% YoY at 121.5mmscmd. Natural gas marketing volumes rose 1.2% QoQ at 98.1mmscmd while margins surged further aiding 9.8% QoQ jump in EBIT. 101% petrochemicals capacity utilisation led to 28.0% surge in petchem volumes at 215,000MT and Rs547mn EBIT vs EBIT loss of Rs1.6bn in Q2FY24. LPG & liq. hydrocarbons segment too turned from loss to profit with EBIT of Rs2.6bn vs Rs167mn EBIT loss in Q2FY24.

Transmission and marketing volume growth to continue

GAIL management expects to source 7-8mmtpa LNG over the next few years with a specific target of sourcing 1-2mmtpa LNG p.a. In early January, GAIL signed a long-term LNG supply deal with Vitol for ~1mmtpa LNG for a period of 10 years starting 2026. With robust gas marketing margins in 9MFY24, management guided FY24E margins to exceed Rs55bn. However, conservatively guided at least Rs40bn margins in FY25E and Rs45bn in FY26E.

Businesses coming back to normalcy, downgrade due to sharp surge in stock price

During Q3, GAIL’s gas transmission average capacity utilisation stood at 58% and the company doesn’t foresee any threat on transmission tariffs for the foreseeable future. Management once again reiterated continued growth in gas transmission volumes. Marketing volumes are also expected inch up owing to focus on signing additional long-term contracts. The company also guided for 5-6% growth in gas marketing volumes. Petrochemicals has turned around and is expected to break-even in FY24E with positive contribution expected from FY25E. GAIL’s buyout of JBF Petrochemicals business is expected to be commissioned by Mar-25. We have upped our near-term numbers based on optimistic marketing margins. Nonetheless, the stock has surged materially over the past three months. Based on our revised estimates, the stock is currently trading at 9.4x/ 7.9x/ 6.3x FY24E/ FY25E/ FY26E EV/ EBITDA. We thus downgrade the stock from Add to Sell with a SOTP based revised TP of Rs140 (Rs131).

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