GAIL's Q3FY18 results (Outperformer) - One offs impact reported earnings, prospects remain robust
Q3FY18 result highlights
- GAIL reported PAT of Rs12.6bn, (+28% yoy, IDFCe Rs13.5bn). Reported PAT included one-time provision of Rs803mn towards a ship or pay settlement and Rs860mn of E&P write offs. Adjusted for this PAT of Rs13.7bn was broadly in line
- Adjusted EBITDA of Rs21.4bn (+24% yoy, IDFCe Rs22bn) and EBIT of Rs17.7bn (+29% yoy, IDFCe Rs18.8bn). Miss vs estimates driven by higher opex in transmission segment and marginal miss in Petchem.
- 6% yoy increase in gas transmission/trading volumes, a 20% yoy increase in petchem volumes and a 10% yoy increase in LHC (LPG+Liquid HC) volumes point to strong operating metrics.
- Transmission/trading EBIT margins declined 840/930bps from the strong levels seen in Q2 due to higher costs.
- Petchem EBIT of Rs0.94bn declined 30% yoy but was up 6% qoq (IDFCe Rs1bn) while LPG EBIT of Rs6.6bn was up 76/44% yoy/qoq.
Key positives: Volume strength across segments, improving petchem and strong LPG earnings
Key negatives: Higher costs in transmission/trading segment
Impact on financials: Unchanged post these results.
Valuations & view
GAIL continues to gain strength with prospects in each of its business improving in recent months. The operational and regulatory environment too is conducive for the company’s strong growth over FY18-20E. Recent events like the PNGRB establishing quorum, spike in LPG prices and the imminent inclusion of Gas in GST combine will create multiple drivers for sustained growth across GAIL’s businesses over next 3 years. We estimate 15% EPS CAGR over FY18-20E on the following: 1) 12-15% revision in transmission tariffs, 2) higher Petchem and LPG volumes, 3) moderate gas costs for the two segments and 4) potential to claim input tax credit for the LPG/Petchem segment. With Management clearly confirming that for CY18 >85% of USD LNG volumes have been sold with ~50% sold for CY19 as well, the overhang of the same should reduce further. We find multiples of 10.2x FY20E PER/ 6.4x EV/E (excluding Rs104/sh of listed investment value) compelling. 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.
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