Key takeaway: GAIL’s EBITDA missed JEFe by 10% on a big miss in gas trading even as the petrochemical segment beat JEFe handsomely. Transmission put up a strong show with vol +1% y/y despite a drop in LNG imports. Petrochemicals volumes and realization surprised positively. We raise FY22E EPS by 6% and maintain our Hold rating as we see the stock as fully valued in the absence of a further rally in the crude price.
EBITDA miss: GAIL’s EBITDA came in 10% below JEFe on a large miss in the trading segment even as the petrochemical segment came in ahead of JEFe. Lower than expected depreciation and higher other income helped PAT beat JEFe by 4%.
Gas Transmission steady: The Gas Transmission segment’s EBITDA was in line with our estimates. Transmission vol was +1% y/y even as LNG imports into India declined 12% y/y, indicating a benefit from new domestic production.
Large miss in Gas Trading: Trading vol declined 6.5% y/y and EBITDA came in sharply below our estimate, buffeted by low demand for spot LNG that saw a spike in price in the early part of the quarter. The prevailing strong crude price is supportive of trading profitability even as spot prices remain elevated (> US$ 10/mmbtu), implying some impact on volumes.
Strong show in petchem: Petchem vol +34% y/y was significantly ahead of JEFe. Realizations at 7% premium to import parity indicated very strong domestic demand. Volumes are likely to be impacted by the pandemic related restrictions in 1QFY22E but profitability should remain strong if the crude price sustains current levels.
LPG segment margin improved but volumes soft: LPG vol -15% y/y came in lower than JEFe but margins improved sharply on lower cost, even though the domestic gas price was flat. LPG realization softened considerably in 1QFY22E, likely weighing on profitability.
Sizable pipeline InvIT could rerate stock: The proposed InvIT could re-rate the valuation multiple of transmission business from 6.5x to 9x lifting GAIL’s fair value 20% (Rs 30/sh) provided sizable assets are transferred. But a small offering looks likely given three pipelines contribute 70% of revenues.
Maintain Hold: We raise FY22E estimates by 6% on higher petchem profitability keeping FY23E broadly unchanged. We modestly raise our SOTP to Rs 150 (from Rs 145). We see limited upside potential in the stock unless crude rallies further from current levels.