Accumulate GAIL; target of Rs 107: Dolat Capital Market

Dolat Capital Market's research report on GAIL

GAIL’s Q2FY21 results were below our estimates on revenue and operating profitability parameters and higher on net profitability front due to higher other income. Natural gas transmission segment revenues increased 8.8% YoY and by 21.4% QoQ as the CGD sector saw revial with industrial units running at Pre Covid levels. Volumes improved 18% QoQ and declined 2% QoQ. Gas marketing segment revenues were down 30.4% YoY and improved 11.3% QoQ. EBIT loss has narrowed down QoQ, however there was a decline due to sharp decline in reduction in the gas marketing spread due to reduction in gas demand. Petchem business has seen a major turnaround. Profitability improved on account of better physical performance and price realisations. EBIT increased due to higher production, decrease in input cost and increase in prices. Petchem plant is now operating at capacity utilization of 100% plus. LPG was fairly stable and demand for LHC products were improved. Profitability of LHC segment was impacted due to lower prices realisations. We believe that most of the negatives are priced in the stock. However, the profitability can see a decline due to shut down in first 2 months of FY21, which has started picking up and is expected to return to normalcy by H2FY21.

Outlook

However, it is expected that considering the slump in demand in Q1FY21 GAIL may end up cutting down on spot volumes. The risk to our call remains a significant decline in profitability in the gas marketing segment. We maintain Accumulate, with a TP of Rs 107. (8x FY23E).