GAIL India - Gas marketing a worry but transmission outlook good - ICICI Securities

GAIL India's (GAIL) recurring standalone Q2FY21 EPS was down 2% YoY hit by gas marketing EBITDA being in the red; all other segments' EBITDA were up YoY. Consolidated EPS fall was steeper at 11% YoY due to 8% YoY decline in the share of profit of associates/JVs. We are now estimating steeper fall in FY21E gas marketing EBITDA but have raised EBITDA for other segments, the net impact of which is an upgrade in FY21E EPS by 19% and in target price by 2% to Rs90/share (1% downside). Tariff reforms may bring gains in gas transmission but gas marketing remains a concern unless there is sharp recovery in oil price. We retain HOLD on GAIL.

- Q2 EPS down YoY hit by gas marketing EBITDA in the red: Q2FY21 standalone recurring EPS was down 2% YoY hit mainly by gas marketing EBITDA in the red at minus Rs3.35bn vs Rs2.54bn in Q2FY20. LPG transmission, gas transmission (net of prior period provision write back of Rs960m) and LPG EBITDA were up 7%, 16% and 11% YoY, while petrochemical EBITDA was up 9x YoY on a very low base. Q2 LPG transmission and petrochemical sales volumes were up 6%-3% YoY while gas transmission and marketing volumes were down 2%-6% YoY to 106.4-88.6mmscmd, respectively. Fall in share of profit from associates and JVs by 8% YoY at Rs2.9bn meant consolidated recurring EPS decline was steeper at 11% YoY.

- Takeaways from earnings call: 1) Share buyback is unlikely given GAIL's large capex plan; 2) gas marketing EBITDA was in the red in Q2 due to some of the US LNG being sold at lower oil linked prices and spot LNG prices with inventory loss being modest; 3) petrochemical EBITDA was boosted by Rs7,500/t QoQ rise in realisation and use of some cheap spot LNG; 4) current gas transmission volumes are higher than FY20 average of 108.4mmscmd in FY20; 5) JHBDPL would be commissioned in phases from Dec'20 to Dec'21 with volumes likely to ramp up to 9-10mmscmd in FY22; 6) Kochi-Mangalore pipeline may be commissioned in Nov'20 with volumes likely to start at 1mmscmd and finally ramp up to 3-4mmscmd; and 7) Rs300bn will be spent on six pipelines projects in the next five years.

- Gas marketing outlook poor unless oil recovers: Despite the surge in spot LNG prices, gas marketing outlook remains poor due to low oil prices; at prevailing Henry Hub and Brent futures, trading loss on US LNG is estimated at Rs28.7-18.6bn in FY22-FY23E and gas marketing EBITDA at minus Rs10bn in FY22E and Rs3.5bn in FY23E. Gas marketing EBITDA is estimated at minus Rs14.9bn in FY21E, Rs5bn in FY22E (Brent at US$50/bbl) and Rs26.6bn in FY23E (Brent at US$55/bbl). US LNG imports will not be in the red if Brent is US$55.4-53.2/bbl or higher in FY22-23E.

- Raise FY21E EPS & target price but cut FY22E EPS: The net impact of bigger gas marketing loss and raising other segment EBITDA is upgrade in FY21E EPS by 19% and target price by 2% to Rs90. FY22E EPS is cut by 3% on cut in marketing EBITDA to Rs5bn from Rs9bn earlier.

Shares of GAIL (INDIA) LTD. was last trading in BSE at Rs.93.5 as compared to the previous close of Rs. 92.7. The total number of shares traded during the day was 101837 in over 910 trades.

The stock hit an intraday high of Rs. 93.95 and intraday low of 92.8. The net turnover during the day was Rs. 9529473.

Source : Equity Bulls

Keywords