Q2FY24 Review: GAIL: Trading gains offset commodity pain

1 Nov 2023 , 11:25 AM

GAIL’s Q2FY24 PAT growth 56% YoY was ahead of forecasts, as weakness in commodity businesses was offset by its trading arm. Through FY24/25, GAIL expects its transmission segment to register 7-8% pa growth and revival in commodity prices to swing performance of LPG and petchem. Analysts of IIFL Capital Services hold FY24/25 forecasts and see valuations inexpensive (base case SoTP of Rs137/share). 

Earnings beat: 

GAIL’s Q2FY24 PAT increased by 56% YoY, ahead of forecasts; while core NG transmission and LNG trading businesses performance was strong with 63%/332% YoY higher Ebitda, petrochemical reported a loss, while LPG just about breaking even (pricing weakness). NG transmission business benefited from 11% YoY growth in volumes and tariff hike; the LNG trading volumes were also up 5% YoY, and benefited from normalisation of international prices (margins up 312% YoY); lower utilisation of petrochemical units (79% vs 47% YoY/81% QoQ) remains an issue on its profitability. Treasury income fell 30% YoY, while 21%/152% YoY higher depreciation and interest respectively reflect impact of the increased capex and borrowings; tax rate during the quarter was also up from 18% to 23%; these factors contained the profit growth, to an extent. 

Improving visibility:

GAIL management during the analyst meet hosted by IIFL, elucidated that: 1) outlook on core transmission business is improving, given moderation in gas prices; it expects to register 7-8% pa growth in FY24/FY25; 2) profitability of transmission business should improve provided PNGRB accepts GAIL’s contentions on cost escalations that it has witnessed towards internal consumption; 3) its trading business is also on strong footing, and should register Ebitda well in excess of annual guidance (Rs35bn; 1H Rs31bn vs Rs28.5bn YoY); 4) recovery in commodity prices should boost performance of LPG/petrochem in H2; 5) key projects, including PDH-PP, pipelines and petrochem (Pata) are progressing well, and will complete progressively through FY24-26. 

Inexpensive valuations: 

GAIL’s H1FY24 performance has been in sync with analysts of IIFL Capital Services assessment, for which they hold FY24/25 earnings forecast. They note earnings are sensitive to LNG trading margins and commodity spreads; a 10% change in each of these leads to 3-6% swing in PAT. The valuations are inexpensive at 9x FY25 PAT, and can re-rate provided earnings growth revives and dividend payout increases from 50% in the base case.