GAIL: Sharp rebound in sight

22 May 2023 , 11:56 AM

Recommendation: Buy

Target Price: Rs. 125

In FY24, GAIL sees “V” shaped recovery in earnings led by higher transmission volumes and tariff, LNG trading, and commodity business. It continues to invest in PP, PDH-PP projects, which can backfire if not executed well; such risks are >FY25. In near term, the stock offers a good trading opportunity as earnings recover.

One-offs drag Q4

GAIL’s Q4FY23 PAT fell by 78% YoY, on the back of provisions in Transmission business and weak performance of the Commodity business. While the volumes were flat YoY in NG transmission, it booked ~Rs. 10 billion non-recurring expenses including Rs. 8 billion towards non-availability of APM gas for compressor fuel. LNG trading volumes were 2% up YoY, while EBITDA was down 68% YoY as it booked inventory losses (Rs. 2.3 billion); leading to 68% fall in margins. Petrochemical EBITDA reported loss as utilization fell 20% and input costs spiked. LPG extraction EBITDA was also down 81% YoY on 28% YoY lower volumes. A 140% YoY higher treasury income contained the profit decline.

Expecting “V” shaped recovery

GAIL CMD expects V-shaped recovery in earnings during FY24, led by pickup in volumes and transmission tariff, swaps entered in LNG trading offering profit cushion, petrochem gaining from lower LNG, and LPG extraction from lower APM prices. Through FY24-26, GAIL expects to commission 7 new pipelines, and key petrochemical projects (60KTA PP at Pata, 500KTA PDH-PP at User), completion of JBF 1.2MT PTA unit, entailing overall capex of Rs. 100 billion, and should enhance GAIL’s commodity business exposure. It is also exploring foray in green hydrogen, solar power generation, which however remains in early stages.

Upgrade FY24 earnings

Analysts at IIFL Capital Services have raised GAIL’s FY24/FY25 PAT forecasts by 8/2% respectively to reflect the guidance issued; ROEs should improve by >500 basis points, on the back of tariff reset that is significantly positive. The stock is cheap at 8xFY25 estimated P/E. Base case SoTP works out at Rs. 133/share, which is based on moderation in commodity earnings by FY25. Consistency in earnings, and pickup in dividend payout should re-rate GAIL’s inexpensive multiples.