BUY on GAIL (India) - Petchem segment performing well - HDFC Securities

Mr. Harshad Katkar & Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities

Our BUY recommendation on GAIL with a price target of INR 129 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. 2QFY21 EBITDA was 9% below our estimate owing to higher-than-expected operating expenses, offset by a 14% rise in revenue. However, APAT was 21% above our estimate due to higher- than-expected other income and lower-than-expected interest cost.

NG transmission: 2Q revenue grew 21/9% QoQ/YoY to INR 15bn, owing to increased demand post lockdown. Transmission volumes came to 106.4mmscmd +18/-2% QoQ/YoY and tariff to INR 1,617/tscm up 13/17% QoQ/YoY. We expect NG transmission volumes to rise to 123mmscmd in FY22E vs. 108mmscmd in FY20.

Petchem: Revenue in 2Q grew 38/4% QoQ/YoY to INR 17bn, led by an increase in sales volumes by 22/3% QoQ/YoY to 224kT and increase in realisations by 13/1% QoQ/YoY to INR 75/kg. On account of better physical performance and price realisation, the operating profit of the segment has reached INR 2.9bn (vs loss of INR 0.4bn in 1QFY21 and profit of INR 0.3bn in 2QFY20). We expect sales volumes of 719/801kT in FY21/22E vs 738kT in FY20.

NG marketing: Operating loss of INR 4bn (vs loss INR 5bn QoQ and profit INR 2bn YoY) was owing to trading loss of INR 411/tscm (vs a loss of INR 700/tscm QoQ and profit of INR 292/tscm YoY). Volumes traded came at 88.6mmscmd (+9/-6% QoQ/YoY) with demand for gas recovering gradually in the country. We expect trading margins of INR 490/tscm (INR 644/tscm in FY20) and volumes of 105mmscmd (96mmscmd in FY20) in FY22E.

Call takeaways: Capacity utilisation in 2Q increased and has almost met normalcy: natural gas transmission 52%, LPG transmission 111%, polymers 108%, and liquid hydrocarbon 81%. Petchem plant is currently operating at optimum capacity. Capex of INR 15/19bn was spent in 2Q/1HFY21, and the target for FY21/22 is of INR 65/66bn respectively. Capex to be mainly spent on CGD, petchem and pipeline projects.

Our target price is INR 129/sh (6.0x Sept-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 7.2x FY22E EPS.

Shares of GAIL (INDIA) LTD. was last trading in BSE at Rs.92.7 as compared to the previous close of Rs. 93. The total number of shares traded during the day was 429043 in over 1589 trades.

The stock hit an intraday high of Rs. 93.2 and intraday low of 91.45. The net turnover during the day was Rs. 39677570.

Source : Equity Bulls

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