Strong earnings from gas marketing and LPG segment, but petchem maintenance and Covid- related disruption in transmission limited a potentially all-time high

EBITDA in 1QFY22: Despite the Covid second wave and maintenance shutdown of the petrochemical plant, GAIL reported EBITDA of Rs 24 billion (down 6% qoq, but up 287% yoy). LPG/HC and gas marketing contributed c40% to EBITDA vs 25% in 4QFY21. With spot LNG prices remaining higher and the company sourcing its LNG from Brent and Henry Hub linked prices, it has been able to sell profitably its LNG cargoes. The company has locked up these rates for the next 1.5 years, which should ensure profitability even in FY23. Similarly, high oil prices have translated into high LPG prices with gas as feedstock, inflating its EBITDA margin to 64% vs 38% in 1QFY21

Petrochemical and transmission volumes will be next engines of earnings growth: The petrochem plant has restarted and high naptha prices are fuelling higher petchem prices, which support gas-based cracker profitability. Similarly, on the transmission side, increasing RIL gas and a gradual recovery of the economy will likely increase gas demand. GAIL is transmitting 4.5mmscmd of RIL gas already. Full commissioning of HUVR fertilizer plants have the ability to increase transmission volume by another c9%

Set for longer-term growth path: The current utilisation rate for GAIL’s pipelines is c53%. As demand increases, the higher utilisation should flow straight through to the bottom line. In addition, a significant part of its pipelines (c20% of Gross Fixed Assets) is still under construction. As these pipelines are commissioned (c7,500km under construction in addition to its existing 12,500km of pipeline), demand should rise and improve the company’s ROE. In the medium term, higher crude oil prices should allow the rest of the business segments to enjoy superior profitability

Trough valuation presents favourable risk-reward: We raise our FY23e/24e earnings by 4%/4%, led by better visibility for the petrochemical and gas trading business. The stock trades at a one-year forward PE multiple of 9x, which is a 25% discount to its 10-year mean, despite much improved visibility on demand and project commissioning. We retain ‘buy’ rating as GAIL should be a key beneficiary of the increasing share of gas in the energy mix. We raise TP to Rs 200 from Rs 195 due our higher ebitda estimates.