Q1FY24 Review: GAIL: Weak quarter

1 Aug 2023 , 11:15 AM

GAIL reported 52% YoY fall in Q1FY24 earnings, which came below the estimates, on the back of weaker-than-expected performance of its Transmission business, loss in Petchem business combined with Rs2.3bn of one-off expense. Transmission business accounted for ~54% of the overall Ebitda. While analysts of IIFL Capital Services retain their FY24/FY25 earnings, volatile commodity spreads make earnings visibility uncertain. Valuations are reasonable (1.2x FY25 Bv) and provide downside support to the stock. 

Weak quarter: 

GAIL’s Q1FY24 PAT fell by 52% YoY to Rs14bn — well below forecasts. Weaker-than-expected performance of the Transmission business, clubbed with continued losses in the Petchem segment, was the key reason for earnings miss. Although Transmission business reported 24% YoY growth in absolute Ebitda (6% higher volumes + higher tariff), Ebitda/scm declined 9% YoY, leading to the miss. Gas marketing volumes fell 2% YoY, in line with expectations. Weaker realisations for polymers (down 26% YoY) led to a fourth-straight quarter loss in the Petchem segment. Additionally, one-off expenses of Rs2.3bn (arbitration clause+ costly gas from previous quarter) also affected the quarter. 

Visibility on demand:

During the conference call, GAIL management shared: 1) Fall in gas prices has aided volume growth for its core Transmission business; should exit FY24 at 123mmscmd; growth thereafter should be 6-7% p.a. 2)Capex target for FY24 is Rs90bn, with Rs24bn already spent in Q1. 3) Petchem plant has been running near full utilisation from July-2023 onwards. 4) Cost of PDH-PP plant at Usar has increased from Rs78bn to Rs113bn with revised completion timeline of Oct-2025, following a detailed project review. 5) It is reviewing the possibility of monetisation of GAIL Gas. 

Earning visibility remains poor: 

Analysts of IIFL Capital Services maintain FY24/FY25 PAT, but note that earnings visibility remains poor. Volatile commodity spreads present a risk to analysts of IIFL Capital Services earnings; a swing of Rs0.1/scm in the LNG marketing margin moves reported EPS by 2%. Similarly, a US$50/MT change in polymer margin leads to a 3% swing in EPS. However, valuations are inexpensive (at 1.2x FY25 Bv) and provide downside support to the stock.