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MOSL: GAIL (Buy)-Fertilizer plants to de-risk US HH contracts starting FY21

GAIL: Fertilizer plants to de-risk US HH contracts starting FY21

(GAIL IN, Mkt Cap USD7.7b, CMP INR122, TP INR150, 23% Upside, Buy)

 

• During 9MFY20, GAIL’s performance was hampered by poor gas trading, petrochemicals and LPG business; however, the transmission business fared well owing to increase in transmission tariffs.
• The management has guided for incremental volumes of ~2mmscmd from Ramagundam, ~2.5mmscd from Matix, and ~4mmscmd from Kochi-Mangalore pipeline from 1QFY21, and 8-9mmscmd in Jagdishpur-Haldia pipeline in FY22; which reiterates our thesis from our .
• This company guides that with start of all fertilizer plants, no US HH contract would be sold outside India.
• Trading at ~40% discount to long-term 1-year forward P/E of 14.0x, GAIL offers an excellent investment opportunity. 

EBITDA miss led by poor LPG business

• GAIL reported EBITDA miss of 18% at INR20.7b (-22% YoY), led by poor LPG and liquid hydrocarbon performance, while petchem saw some marginal improvement after reporting a huge loss in 1QFY20. Depreciation was higher by 35% YoY, which was offset by higher other income (+42% YoY).
• PBT was at INR18.7b and the company paid tax at rate of 33.2% during the quarter. GAIL is still in the process of evaluating the new tax rate option. PAT came in 20% below est. at INR12.5b (-26% YoY). The company took tax write-back of INR173m, adjusting for which, PAT stood at INR12.7b.
• For 9MFY20, reported EBITDA and adj. PAT were lower by ~25% YoY at INR58.9b/INR35.8b. Higher depreciation was offset by higher other income.