Overall, FY21E shall be impacted by COVID, but not acutely as volumes have already revived to ~90% of normal after the sharp downturn in April.
GAIL’S Q4FY20 EBITDA of Rs 24.7bn (up 47% YoY) came in ahead of our estimate (of Rs 17bn) led by higher Natural Gas (NG) trading margins and LPG/Liquid hydrocarbons segments (LHC). Key highlights: i) Trading margins rose to Rs 0.71/scm (up 7% YoY) due to lower input cost spot LNG prices (-47% YoY). ii) NG transmission EBITDA margin expanded to Rs 1.17/scm (up 12.1% YoY) as opex cost slid 11% YoY. Volumes were flat YoY at 109mmscmd despite the lockdown impact. iii) LPG/LHC EBITDA came in at Rs 5.5bn (up 22.6% YoY) led by a higher realisation of Rs 38.2/kg (up 14% YoY). iv) With the Pata petchem plant running at 100%-plus utilisation and lower input LNG cost, petchem EBITDA doubled to Rs 1.8bn (up 107% YoY), beating estimates.
The JHBL pipeline should come on stream in FY21, lifting supply to fertiliser and CGD customers by 8mmscmd in FY22. Overall, FY21E shall be impacted by COVID, but not acutely as volumes have already revived to ~90% of normal after the sharp downturn in April.
Maintain ‘BUY’ with an SoTP based TP of Rs 133/share based on the inexpensive 6.3x FY22E EV/EBITDA. An 11% YoY fall in opex costs with modest volumes at 109mmscmd (flat YoY) lifted trading EBITDA margin to Rs 1.17/scm (up 12% YoY). The gains were primarily on unhedged HH volumes, with weak spot LNG prices in Q4. Petchem continued to surprise positively with lower contract LNG prices (three-month lag) and gains from operating leverage due to 100%-plus utilisation.
GAIL incurred capex of Rs 60bn in FY20 largely towards pipelines. Its net debt/equity remains at 0.1x for FY20. Petchem subsidiary BCPL benefited from a feedstock subsidy of Rs 9bn with total gains of Rs 45bn — to be realised over the next 15 years to meet the targeted IRR.
GAIL offers a diversified play on India’s gas consumption story with future growth likely to driven by transmission/marketing volume growth and higher petchem capacity. The stock’s current valuation is attractive at 6.3x FY22E EV/EBITDA. Maintain ‘BUY/SP’ with an SoTP-based TP of Rs 133/share.