14 December 2020
Company Update | Sector: Oil & Gas
GAIL
Buy
BSE SENSEX
46,253
S&P CNX
13,558
CMP: INR126
TP: INR155 (+24%)
Improving macros to drive earnings/rerating
Stock Info
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
GAIL IN
4,510
566 / 7.7
133 / 66
28/-7/-8
1654
48.2
Financials Snapshot (INR b)
Y/E March
FY21E FY22E FY23E
Sales
576.4 712.8 741.6
EBITDA
54.6
97.4 102.0
Adj. PAT
37.6
69.1
72.9
Adj. EPS (INR)
8.3
15.3
16.2
EPS Gr. (%)
-49.3
83.8
5.5
BV/Sh.(INR)
111.3 121.2 131.8
Ratios
Net D:E
0.1
0.1
0.1
RoE (%)
8.3
14.2
13.7
RoCE (%)
7.0
11.7
11.5
Payout (%)
35.0
35.0
35.0
Valuations
P/E (x)
15.1
8.2
7.8
P/BV (x)
1.1
1.0
1.0
EV/EBITDA (x)
8.6
5.4
5.0
Div. Yield (%)
1.9
3.5
3.7
FCF Yield (%)
-2.7
6.9
6.1
Shareholding pattern (%)
As On
Sep-20 Jun-20
Promoter
37.6
37.6
DII
30.9
33.6
FII
15.6
15.5
Others
15.9
13.2
FII Includes depository receipts
Stock Performance (1-year)
Owing to the huge demand supply mismatch across the globe on the path of
normalization in the post COVID world, spot LNG prices and petchem margins are
trending at multi-year highs. GAIL has reported concerns in its Gas trading and
Petchem segment in 1HFY21, which are now likely to see some gains.
GAIL has outperformed the Nifty by ~30% (rallying ~36%) over the last one-month
and since its 2QFY21 result. Despite the recent rally, GAIL is trading at 5.4x FY22E
EV/EBITDA and 8.2x FY22E P/E.
Changing macros, if sustained, could result in an earnings/target price upgrade.
The company also has strong tailwinds such as (a) boost in transmission volumes
from increased domestic gas production, (b) upcoming LNG terminals, and (c) the
NGT’s increasing impetus on curbing air pollution
We reiterate GAIL as one of our top large-cap picks in the sector.
Spurt in spot LNG prices
GAIL sells ~10mmscmd of LNG outside India. Although it tries to cover its
high-cost US HH contracts via various swap/time/destination swap/hedging
contracts, an adverse situation of low oil prices combined with low spot LNG
prices results in poor profitability. The company reportedly witnessed a loss
in its marketing segment in 1HFY21.
From the lows of USD2.2/mmBtu in May’20, spot LNG prices recovered due
to shutdowns in liquefaction plants and recovery in demand to
USD8/mmBtu for Feb’21 delivery (link).
Combined with this, restart of the Kochi-Mangalore pipeline and pre-
commissioning of Gorakhpur, Sindri and Barauni fertilizer plants along the
Jagdishpur-Haldia pipeline would eliminate all concerns on US HH contracts
by mid-2021.
Delayed normalization in demand for refined petroleum products,
disruptions in few large petchem plants, and revival in demand has resulted
in short-term relief on petchem margins. PE-naphtha/PP-naphtha margin is
up 75%/107% YoY and 19%/47% QoQ in 3QFY21 till date.
Many Chinese and Middle East petchem expansions are still underway,
which may bring down margins going forward.
Due to difficulty in placing high-cost US HH contracts, it is understood that
GAIL had to use some part of the high cost gas as feedstock in its petchem
plant. With the waning of concerns on these contracts, profitability of the
petchem segment would also be boosted.
Conservatively, we forecast a transmission volume of 104/120/125mmscmd
in FY21E/FY22E/FY23E v/s 108mmscmd in FY20. We also highlight that gas
availability in India is expected to witness a sharp jump going forward.
From the KG-basin itself, over the next 2-3 years, both RIL and ONGC are
expected to produce an incremental 43mmscmd of gas, most of which
would flow through GAIL’s network.
Spurt in short-term petchem margin to aid profitability
Sep-19
37.6
33.9
15.5
12.9
Expect large spurt in transmission volumes
Swarnendu Bhushan- Research Analyst
(Swarnendu.Bhushan@MotilalOswal.com)
Sarfraz Bhimani - Research Analyst
(Sarfraz.Bhimani@MotilalOswal.com)
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.