HDFC Securities - BUY Recommendation on GAIL (India) - Petchem segment shines!

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

Our BUY recommendation on GAIL with a price target of INR 195 is based on 9% CAGR expansion in gas transmission volume over FY21-23E to 124mmscmd 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 parts of India. 4QFY21 EBITDA/APAT were 7/7% below our estimates owing to higher-than-expected raw material cost and operating expenses, offset by an 8% rise in revenue and lower-than-expected finance cost and tax outgo.

NG transmission: 4Q revenue fell 5/2% QoQ/YoY to INR 15bn. Transmission volumes came in at 109.8mmscmd (-1/+1% QoQ/YoY) and tariff at INR 1,554/tscm (-5/+1% QoQ/YoY). The operating profit remained flat at INR 12bn.

Petchem: Revenue in 4Q grew 15/82% QoQ/YoY to INR 22bn, with an increase in sales volumes by 1/35% QoQ/YoY to 234kT, and a healthy realisation of INR 95/kg (+13/+36% QoQ/YoY). The operating profit of the segment has reached INR 7bn in 4Q on account of better physical performance and improved price realisation, the highest ever reported in a quarter in the past seven years. The overall plant utilisation for the year was above 100%.

Conference call takeaways: (1) Capex of INR ~70bn was spent in FY21, mainly on pipelines, equity contribution, and maintenance. The target for FY22/23/24 is INR 70/120/90bn. (2) The Board completed buyback of 69.76mn fully paid-up equity shares of FV INR 10/sh for an aggregate amount of INR 10.5bn in March'21. (3) The management has guided for a 6-8% CAGR in the gas transmission business over the next three years, after which the business will grow at a higher rate. (4) Expansion projects of the petchem plants at Pata and Hisar are expected to be completed by Sep'23.

Change in estimates: We raise our FY23E EPS estimate by 2.3% to INR 19.4 to factor in the change in gas transmission volume assumption and increased crude oil price assumption.

Our target price is INR 195/sh (7.0x Mar-23E EV/e for the stable Gas, LPG transmission and gas marketing business, 5.0x EV/e for the cyclical petchem and LPG/LHC business, INR 38 for investments). The stock is currently trading at 8.4x FY23E EPS.

Shares of GAIL (INDIA) LTD. was last trading in BSE at Rs.163.7 as compared to the previous close of Rs. 163.45. The total number of shares traded during the day was 1223938 in over 9512 trades.

The stock hit an intraday high of Rs. 167.75 and intraday low of 161.3. The net turnover during the day was Rs. 200877367.

Source : Equity Bulls

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