The recent sharp recovery in Brent crude oil price to $ 68-70/bbl has considerably improved the earnings visibility for GAIL’s downstream businesses (petrochemical and LPG-LHC segments, both combined accounted for 37% of overall EBITDA in Q3FY2021). International HDPE price has improved sharply and is hovering at $1150/ tonne currently as compared to $1011/mt in Q3 FY21. GAIL’s petrochemical plant is running at full utilisation (106% in Q3FY21). GAIL share price closed at Rs 149, down over Rs 5 or 3.3%.

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Furthermore, Asian spot LNG price has remained at elevated level of $18.5/$12.7 per mmbtu in January/February 2021 and is still at a comfortable level of $6-7/mmbtu, which bodes well for turnaround of GAIL’s gas trading business and gives confidence with respect to normalisation of EBITDA to Rs. 2,200 cr - 2500 cr from gas trading over FY22E-FY23E.

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GAIL’s gas transmission business is on firm footing, as commissioning of new pipelines, ramp up of domestic gas production, and favourable regulatory environment (unified tariff and target to increase share of gas to 15% by 2030) would drive sustained volume-led earnings growth from the segment.

Additionally, potential inclusion of natural gas under the GST regime could substantially improve gas consumption in India and could act as a key trigger for volume growth across GAIL’s gas transmission and marketing segments. Sharekhan have increased our FY2022-FY2023 earnings estimates to factor in higher EBITDA from the petchem business and expect GAIL’s EBITDA/PAT to post a strong 30%/29% CAGR over FY2021E-FY2023E.

GAIL’s valuation of 6.5x its FY2023E EV/EBITDA (27% discount to historical average one-year forward EV/EBITDA multiple of 9x) seems attractive, given expectation of strong earnings revival, potential value unlocking from monetisation of gas pipeline assets, and dividend yield of 5%. Hence, Sharekhan maintains their Buy rating on GAIL with a revised price target of Rs 175 (reflects higher value for the petchem segment and increased value of listed investments)

GAIL Key Risks:

Lower-than-expected gas transmission and marketing volumes amid COVID-19 demand slowdown. A sharp decline in LNG price and international oil prices could impact profitability of gas trading, petrochemical, and LPG-LHC segments.