GAIL's Q2FY18 results (Outperformer) - Strong transmission/trading performance
Q2FY18 result highlights
- GAIL reported PAT of Rs13.1bn, (+35% yoy, IDFCe Rs10.8bn), with EBITDA of Rs20.7bn (+35% yoy, IDFCe Rs18.8bn) and EBIT of Rs17.3bn (+47% yoy, IDFCe Rs15.3bn). Beat vs estimates driven by higher transmission/trading segment earnings which offset lower LHC.
- Strong operational metrics, with a 5% yoy increase in gas transmission/trading volumes, a 25% yoy increase in petchem volumes and a 18% yoy increase in LHC (LPG+Liquid HC) volumes.
- Reported EBIT margin at 15.8% for the qtr, up 130bps qoq/ 460bps yoy, driven by the highest transmission EBIT of Rs8.5bn in 3 years (+33% yoy, IDFCe Rs6.3bn) while trading EBIT of Rs4.2bn (+27% IDFCe Rs3.2bn) was also strong.
- Petchem EBIT of Rs0.9bn declined 43% yoy (IDFCe Rs1bn) while LPG EBIT of Rs4.6bn while doubling yoy was below our estimates of Rs5.9bn.
Key positives: Strong Transmission/trading earnings and stronger utilisation of Petchem and LPG segment capacity
Key negatives: Pressure on realisations in petchem, US LNG remains a question mark
Impact on financials: We increase FY18/19E EPS marginally by 1.5/1.2% to factor tweaks to volumes/margins. FY20E EPS of Rs36.4/sh introduced. TP raised to Rs520/sh.
Valuations & view
We continue to remain positive on GAIL, with structural improvement being seen across business segments over the next 2 years. With higher utilisation of the petchem segment, stronger margins for the LPG segment and a gradual improvement in the transmission/trading segment profitability, we see healthy earnings CAGR of 18% over FY18-20E, coupled with the higher value of investments in ONGC/PLNG/IGL/MGL/China Gas. Current multiples of 9.7x FY20E EPS/ 5.8x EV/EBITDA (net of investment) remain attractive, our price target of Rs520/sh (based on a 12x FY20E EPS multiple + investments @20% Disc to CMP net of estimated US LNG trading loss) offers a ~14% upside from CMP. Reiterate outperformer.
Gail India is engaged in the natural gas, liquified natural gas ("LPG"), liquid hydrocarbons and petrochemicals exploration and production and city gas distribution through its natural gas trunk pipelines covering a length of around 7000 km and over 1900 km of LPG pipeline transmission network. Co. is also engaged in the telecom business with the network of approx. 13,000 km throughout India. Co. operates six primary business segments: Transmission Services, Natural Gas Trading, Petrochemicals, LPG and other Liquid Hydrocarbons, GAILTEL and City Gas Distribution.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
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