GAIL Q4 Review: Rising Gas Demand, Better Realisations Prompt Bullish Brokerage Calls

Analysts remained bullish on GAIL India Ltd. on account of higher petrochemicals realisations, hopes of benefiting from rising natural gas demand, and commissioning of new pipelines, among others.

The state-owned gas distributor reported a 28% sequential jump in net profit in the quarter ended March, helped by higher other income and a fall in expenses. Its petrochemicals and natural gas marketing segments revenue rose over the previous three months, while the transmission services segment revenue declined.

Its operating margin expanded, aided by a reduction in costs such as raw materials, employee benefit expenses, depreciation, and other expenses.

Shares of GAIL were trading flat around 12:30 p.m. on Friday. Of the 36 analysts tracking the stock, 33 recommend a ‘buy’ and four suggest a ‘hold’, according to Bloomberg data. The average of the 12-month consensus price target implies an upside of 14.3%.

Here’s what brokerages have to say about GAIL’s fourth quarter results:

Antique Stock Broking

• Ebitda missed estimates due to lower-than-expected gains in marketing segment and poor performance of LPG and hydrocarbon segment.

• Lower volumes and lower tariff realisation have impacted the natural gas transmission Ebitda, which declined 3.4% QoQ.

• The performance of the natural gas marketing segment was weaker than expected. However, the segment outlook remains positive due to rising commodity prices.

• Petrochemicals segment posts record profit on account of better unit realisation more than setting off the increase in gas cost.

• Revenue from the city gas distribution business, consisting primarily of GAIL Gas improved in the fourth quarter. However, the CGD business EBIT remained unchanged due to the increase in input spot LNG prices.

• GAIL is the biggest beneficiary of the rising gas demand in the country that will drive its pipeline earnings.

Yes Securities

• Natural gas transmission volume declined marginally by 0.5% QoQ. On the other hand, natural gas trading volumes fell 4.4% QoQ in the fourth quarter.

• Petrochemicals profitability improved both QoQ and YoY by 13% and 35%, respectively, on account of higher realisations.

• LPG segment profitability improved 68% QoQ on account of stronger LPG realisations.

• GAIL incurred a capex of Rs 7,000 crore for FY21. The planned capex for FY22, FY23, and FY24 is estimated at Rs 7,000 crore, Rs 12,000 crore and Rs 9,000 crore, respectively.

• Natural gas transmission and trading volumes are expected to improve going forward.

• Investments in pipeline and petrochemical capacity addition would also aid earnings.

Nirmal Bang

• GAIL’s Q4 standalone profitability was driven by a turnaround in gas marketing from expected loss to profit and outperformance of the petrochemicals segment.

• Revenue was below estimates, driven by the miss in natural gas marketing and liquid hydrocarbon businesses.

• Management expects healthy earnings in FY22 due to buoyant oil and LNG future prices and likely diversion of overseas gas sales volume.

• There is a potential risk of a reversal in the commodity cycle that could hurt gas marketing, petrochemicals, and LPG and hydrocarbon segments.

• GAIL’s capex plans increase its exposure to the cyclical petrochemicals business in an already crowded market.

Emkay

• LPG transmission Ebitda fell 5% QoQ, with volumes and tariff down 3% and 1% QoQ respectively.

• Gas pipeline tariff was 1% lower QoQ.

• The consolidated gas marketing EBIT of Rs 670 crore in Q4 was much higher, indicating global trading gains.

• The company is foraying into new businesses like compressed bio-gas, ethanol 1G refineries, and renewable energy to diversify.

• Raises FY22/23E EPS by 19%/23%, building in higher gas marketing-petchem margins and other Income.

Prabhudas Lilladher

• Record petrochemicals profitability plus improving LPG and gas trading segment drive profits.

• The petrochemicals operating performance improved sharply due to healthy production. Also, the petrochemical prices spiked globally given supply chain disruptions.

• Transmission volumes improved while gas sales volumes were weak in Q4.

• A sharp recovery in commodity prices in line with recovering economy augurs well for GAIL.

• The commissioning of new pipelines over the next one year will augment volumes and profits.

Motilal Oswal

• Continued outperformance in the petrochemical business (owing to multi-year high margin during 4QFY21) and liquid hydrocarbon business (on the back of improvement in realisations) helped Q4 earnings.

• Expects gas trading and the liquid hydrocarbon business to do even better in the current high spot LNG and Brent price environment.

• Commissioning of various fertiliser plants by the end of FY22 will help the trading segment.

• The gas transmission volumes to grow at 7-8% YoY over the next three-four years, with further upside after the completion of the national gas grid.

Ambit Capital

• GAIL benefited from commodity cycle rebound in petrochemicals and gas marketing businesses and these trends are expected to persist.

• The government’s gas push has intensified as evidenced by the MoPNG’s granular monitoring of new CGD rollouts.

• India’s gas demand will grow due to continuous pull from CGDs and fertiliser plants.

• The company remains the largest beneficiary of increasing gas demand in India fuelled by cheap global supply.

• The marketing profits will improve as GAIL won‘t need to re-sell gas abroad and subject itself to market vagaries from FY23.

• Cuts FY23 Ebitda estimates by 11% as Covid-induced delays in projects execution is likely to impact volume offtake and marketing.