GAIL India - FY21 under cloud after big gas marketing loss in Q1 - ICICI Securities

GAIL India's (GAIL) consolidated and standalone Q1FY21 EPS was down 56-80% YoY, hit by a big loss in gas marketing and fall in EBITDA in most other segments. Q1FY21 consolidated EPS fall was less steep due to jump in share of profit of associates and JVs. To factor-in the disappointment in Q1FY21, we have cut our gas marketing EBITDA by 76%. This has led to cut in FY21E EPS by 6%, and, together with fall in value of investments, led to cut in target price by 10% to Rs101 (4% upside). Further downside to FY21E gas marketing EBITDA, or it being in the red, is not ruled out. However, outlook on gas marketing in FY22 is much better as supply to fertiliser plants starts. Tariff reforms may also bring gains. Downgrade to HOLD from Add.

- Q1 EPS down 56-80% YoY: Q1FY21 standalone EPS was down 80% YoY, hit by gas marketing EBITDA loss of Rs5.2bn vs Rs8.6bn in Q1FY20 and 11-46% YoY fall in gas transmission and LPG & other liquid hydrocarbon EBITDA. Petrochemical EBITDA was in the red, but loss was 63% YoY lower. Q1 LPG transmission and petrochemical sales volumes were up 16%-35% YoY while gas transmission and marketing volumes were down 14%-16% YoY to 90-81mmscmd respectively. Surge in share of profit from associates and JVs by 75% YoY at Rs4.5bn meant consolidated recurring EPS decline was less steep at 56% YoY; main driver of this rise was Rs2.5bn profit by Brahmaputra cracker vs loss in Q1FY20.

- Takeaway from earnings call: 1) Gas marketing standalone and consolidated EBITDA loss of Rs5.2bn-5.8bn included inventory loss of Rs2.5bn on mark to market in Jun'20; 2) other reasons for gas marketing loss were: sale of 7-8mmscmd of US LNG at spot LNG prices as it was not bought by CGD, fertiliser and power due to switch to domestic gas/fall in demand, and some US LNG sold to consumers at oil-linked prices leading to a loss; 3) currently, gas transmission volumes are at 111mmsmcd (108.4mmscmd in FY20) and marketing volumes at 87mmscmd (96.4mmscmd in FY20); 4) Rs98bn of total capex of Rs136bn for Jagdishpur-Haldia- Bokaro-Dhamra pipeline (JHBDPL) has been incurred and grant of Rs36bn has been received from GoI; 5) JHBDPL is expected to be commissioned in phases from Dec'20 to Dec'21 with volumes at 10mmscmd in year-1 and 16mmscmd once four new fertiliser plants and three existing refineries are connected; 6) Kochi-Mangalore pipeline is in the last stage of completion and would be commissioned soon; 7) GAIL is set to implement 8,400km length pipelines at a cost of ~Rs210bn by CY23; 8) GAIL's petrochemical plant is now operating at 100% utilisation vs 66% in Q1; 9) DoT has withdrawn demand of Rs1.83trn vide letter dated 14-Jul'20.

- Cut FY21E EPS and target price: We have cut FY21E gas marketing EBITDA by 76% to Rs1.1bn to factor-in the Q1 disappointment. This has led to cut in FY21E EPS by 6% and cut in target price (also due to fall in value of investments) by 10% to Rs101. FY21E gas marketing EBITDA could even be in the red though rise in spot LNG price to US$3.1/mmbtu (US$2.1/mmbtu in Q1) and domestic demand recovery offer hope.

Shares of GAIL (INDIA) LTD. was last trading in BSE at Rs.95.95 as compared to the previous close of Rs. 97.5. The total number of shares traded during the day was 759222 in over 5640 trades.

The stock hit an intraday high of Rs. 99.05 and intraday low of 95.7. The net turnover during the day was Rs. 73556174.

Source : Equity Bulls

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