Mr. Harshad Katkar & Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities.
Our BUY recommendation on GAIL with a price target of INR 128 is based on 15% CAGR expansion in gas transmission volume over FY21-23E to 137mmscmd on the back of (1) increase in domestic gas production, (2) increase in demand of RLNG, and (3) completion of major pipelines in the eastern and southern part of India. 1QFY21 EBITDA/APAT was 47/52% below estimates as the company reported an operating loss of INR 5bn in the NG marketing business vs our expectation of a profit of INR 4bn.
NG transmission: 1Q revenue dipped 18/14% QoQ/YoY to INR 13bn, owing to 17/14% YoY/QoQ decline in transmission volumes to 90.2mmscmd and 7/4% YoY/QoQ fall in tariff to INR 1,436/tscm. We expect NG transmission volumes to rise to 103/123mmscmd in FY21/22E vs. 108mmscmd in FY20.
Petchem: Revenue in 1Q grew 0.4/10% QoQ/YoY to INR 12bn, led by an increase in sales volumes by 5/35% QoQ/YoY to 183kT. However, distress prices of polymers (HDPE, LLDPE) resulted in 5/18% QoQ/YoY fall in realisation to INR 67/kg. Hence, the segment reported an operating loss of INR 430mn (vs profit of INR 2bn in 4QFY20 and loss of INR 1bn in 1QFY20). We expect sales volumes of 650/801kT in FY21/22E vs 738kT in FY20.
NG marketing: Operating loss of INR 5bn (vs profit of INR 6/9bn QoQ/YoY) was owing to trading loss of INR 700/tscm (vs a gain of INR 709/980 QoQ/YoY). Volumes traded declined to 81.2mmscmd (-17/16% QoQ/YoY) with a reduction in India’s gas demand in 1Q. We expect trading margins of INR 146/155 tscm (INR 644/tscm in FY20) and volumes of 90/105mmscmd in FY21/22E (96mmscmd in FY20).
Takeaways from the earnings call: Capacity utilisation in 1Q declined across segments: natural gas transmission 45% (vs. 53% QoQ), petchem 76% (vs. 86% QoQ), LPG transmission 99% (vs. 109% QoQ), polymers 66% (vs. 103% QoQ), liquid hydrocarbon 76% (vs. 85% QoQ). Demand for gas has recovered in 2Q.
Our target price is INR 128/sh (6.0x Mar-22E EV/e for the stable Gas, LPG transmission and gas marketing business, 4.0x EV/e for the cyclical petchem and LPG/LHC business, INR 35 for investments). The stock is currently trading at 10.6x/7.9x FY21/22E EPS.
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.