GAIL’s reported EBITDA of Rs 6.2 billion (-75% q-o-q, -72% y-o-y) was 55% / 62% below our /Bloomberg consensus estimates, driven by a very large loss in gas marketing. While marketing loss does not surprise us (we expect Gail to report marketing losses for both FY21F and 22F), the quantum was much higher, with reported segment Ebit loss of Rs 5.5 billion (our FY21F estimate of Ebit loss is Rs 3.6 billion).
While some loss may be recouped (inventory loss of Rs 2.5 billion in 1Q), and demand is recovering fast (in part due to higher spot LNG imports), we think there will be more losses in marketing particularly in 2HF (Gail had several open cargoes, which it may need to dispose at spot LNG prices). Despite much higher sales volumes, petchem was back in losses, due to lower prices and sharply increased opex. As Gail has a large position of higher priced long-term LNG, we expect the segment to remain in losses in the near term. We have non-consensus ‘reduce’ rating on Gail, as marketing is our biggest concern. Much higher marketing losses increases our concern, and we think it will lead to street cutting earnings for Gail. We reiterate our ‘reduce’ rating on Gail.
Due to the impact of Covid-19, operating volumes were weak, but in line with our expectation for gas transmission (90mmscmd, -17% q-o-q, our estimate was 90 mmscmd), gas marketing (81mmscmd, -17% q-o-q, our estimate of 80mmscmd) and LPG/liquid hydrocarbon (265kt, -12%, our estimate 265kt). While petchem production declined 36%, petchem sales at 183kt (+5% q-o-q, our estimate 130kt) were higher as Gail disposed large inventories from 4QFY20.