GAIL rating – ‘Hold’: Oil at $70 level could boost Ebitda by 15%
InvIT listing could yield Rs 30 to TP if of proper size; ‘Hold’ retained, as risk-reward is balanced, with TP of Rs 150
Our FY22E Ebitda estimates could see 15% upgrade on the back of higher nat gas trading and LPG profitability if crude sustains at $70. Our fair value is Rs 170 at $70, Rs 193 at $80. A potential InvIT listing could yield Rs 30/share upside provided it is of meaningful size. However, any significant correction in crude price remains the key risk. Maintain Hold with PT of Rs 150 on balanced risk-reward.
FY22E Ebitda rises 16% for every $10 rise in average crude price: Cyclical segments viz. natural gas trading and LPG sales with: (i) crude-linked realisation on part or all of the output; and (ii) less volatile feedstock cost drive the steep upside in Ebitda. Nat gas transmission segment Ebitda falls 1-2% due to higher cost of fuel
SOTP rises Rs 20/share for every $10 rise in average crude price: Our fair value estimate increases 14% applying the same multiples that we use in our base case to value the enhanced nat gas trading and LPG business profits. Our Fair Value estimates at $70 is Rs 170 and at $80 is Rs 193.
NG trading, LPG profitability see highest boost: Natural gas trading benefits from the less volatile Henry Hub linked sourcing cost for c50% of its Spot volume and the widening differential of Asia Spot LNG (GAIL’s selling price for the non-contracted portion) over landed Henry Hub cost. The LPG business benefits from low feedstock cost (APM gas cost) while realisations increase on higher crude price. GAIL can retain the LPG profitability benefit as LPG subsidies are almost nil currently posing no risk of an unforeseen burden.
Petchem profitability range bound with steep rise in feedstock cost: We see limited upside potential to polyethylene profits with feedstock costs rising sharply on account of the rally in Asia Spot LNG price ($13+/mmbtu currently). The proportion of Asia Spot in feedstock mix will increase over FY22E as 3-4mmscmd of US LNG gets allocated to fertiliser plants.
Pipeline InvIT could re-rate transmission multiple: The proposed InvIT could re-rate the valuation multiple of transmission business from 6.5x to 9x lifting GAIL’s fair value by 20% (Rs 30/sh) provided sizable assets are transferred. GAIL hasn’t disclosed which two pipelines it has proposed to offer in the InvIT.
Stock disc $60 crude, upside possible from sustained crude strength, Hold: If crude sustains in the $70s, GAIL’s FY22e Ebitda could see c15% upgrade opening up room for c15% upside potential from current levels. A potential InvIT listing could also yield 20% upside to our PT. However, any significant correction in crude price remains the key risk. Maintain Hold as we see risk-reward balanced at current price.
