Q3FY24 Review: GAIL: Strong performance; firm outlook

30 Jan 2024 , 01:59 PM

GAIL’s Q3FY24 PAT growth of 1057% YoY exceeded forecasts, driven by strong all-around performance. Through FY24-26, GAIL anticipates 6-7% annual growth in its transmission segment, with the trading business continuing to deliver strong performance (active swapping, etc.). Analysts of IIFL Capital Services upgrade FY24/FY25/FY26 PAT by 9%/4%/5% respectively and see valuations reasonable (Base case SoTP of ₹185/share). 

Earnings beat: 

GAIL’s Q3FY24 PAT at ₹28.43bn (up 1057% YoY) was ahead of the forecast on the back of an all-around strong performance. The core NG transmission reported a 116% higher Ebitda, and the petrochemical, NG trading, and LPG business also returned to profitability from loss/breakeven YoY. NG transmission business benefited from 17% YoY growth in volumes and tariff hike; the LNG trading volumes were also up 9% YoY and benefited from normalization of international prices. Petrochemical business returned to 100% utilization levels (vs 34%/79% YoY/QoQ). However, the 26%/49% YoY increase in depreciation and interest, respectively, reflects the impact of increased capex and borrowings while the tax rate during the Q3 was 23%, in contrast to a tax reversal YoY; these factors contained the profit growth, to an extent. 

Firm outlook: 

During the conference call, GAIL management shared: 1) Gas demand outlook remains strong, driven by CGDs, industries, and fertilizer units. Transmission volumes expected to grow 6-7% pa.; 2) its trading business is also on strong footing, and should earn minimum of ₹40bn of Ebitda pa in FY25/FY26 3) Petrochemical profitability to sustain, as it has contracted LNG at favourable terms; 4) Key projects, including PDH-PP, IPA plant at Usar, pipelines, and petchem plants at Pata and Mangalore, progressing well, set for completion in phases by FY25-26 5) it will continue to invest ₹75bn pa, over the next 2-3 years, to complete ongoing projects, CGDs, and new energy initiatives such as hydrogen etc. 

Upgrade earnings:

Analysts of IIFL Capital Services upgrade FY24/25/FY26 EPS by 9%/4%/5%, to reflect the stronger than-expected Q3 and firm outlook on the trading business which can see further upsides if GAIL continues to earn strong LNG trading margins. Valuations at 12x FY26 earnings are reasonable, and can see a re-rating if earnings growth revives and dividends improve.