GAIL delivered 24% EBITDA growth driven by improvement in transmission, trading & LPG segment. Petchem saw pricing pressure along with increase in cost. Transmission & trading is on structurally growth phase for next few years on increase in domestic gas production and regulatory tailwinds (unification, tariff framework revision). GAIL’s business model is geared towards higher oil price and lower LNG price and this trend will be more visible in next few quarters. Volume & Tariff increase will expand muted RoCE in transmission segment and thus over valuation multiple. We expect 8%/18% EBITDA/EPS CAGR over FY17-20E and 400bps expansion in ROE. We upgrade to LONG rating with SoTP based Mar’19 of Rs. 521.
Strong growth in core segment: In 2QFY18 transmission/trading volume increased by 5%/5% yoy driven by increase in power demand and higher domestic gas production. We see transmission volume remain steady and expect uptick in FY19 post increase in domestic gas production from ONGC fields. We are building in 104/110mmscmd transmission volume in FY18E/FY19E. Blended tariff increased by 5% to Rs 1,351/tscm due to more volume going into zone-4. We are not building any possible upside from unification of tariff for GAIL and expect more clarity by mid CY18.
Petchem disappointment continues: Petchem volume increased 29% yoy but increase in domestic capacity led to decline in petchem realization. Petchem realization will lower due to higher domestic supply. Petchem spread declined by ~$60/MT to $80/MT. Petchem EBIT was down 45% yoy to Rs 888mn. We expect petchem volumes to increase in FY18E/19E on back of higher utilization and expect spread to be $85/$114 per MT for FY18E/19E.
EBITDA increased by 24%: Decline in APM gas cost, higher volume and relatively lower decline in LPG realization led to ~205% yoy improvement in LPG EBIT at Rs. 4.6bn. Transmission EBIT increased 29% yoy on improved volume, higher realization and lower cost. Trading EBIT increased 27% yoy at Rs. 4.2bn. LPG transmission segment reported increase in volume by 18% yoy. EBITDA was up 24% yoy and 17% higher than EE to Rs. 19bn. Other income/interest expenses declined. Recurring PAT increased by 42% yoy to Rs. 13bn and 16% above EE