GAIL (India) Limited (GAIL.NS) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the GAIL India Limited Q1 FY '22 Earnings Conference Call hosted by Yes Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nitin Tiwari from Yes Securities. Thank you, and over to you, sir.

Thank you, Karuna. Good evening, ladies and gentlemen. On behalf of Yes Securities, I welcome everyone to GAIL India Limited's First Quarter FY '22 Earnings Call. Today, we have the pleasure of having with us the senior management team from GAIL India Limited led by Director of Finance, Shri A.K. Tiwari. I will now hand over the call to the management for their opening comments, which shall be followed by a question-and-answer session. Over to you, sir.

Good afternoon, my dear friends from investors and analyst communities connected through WebEx. A very good afternoon, and welcome to the GAIL Earnings Call Q1 FY '22. Thank you all for taking your business time and showing keen interest in the results and performance outlook of GAIL. We have declared the results of the first quarter in the year '21, '22 earlier today, and I'm sure that you must have got the opportunity to go through it. I would give you a very brief insight of the company's performance for the quarter ending 30 June 2021. Due to localized restrictions and lockdowns imposed by the various state governments to cut the impact of second wave of COVID-19, the demand in certain pockets were slightly impacted in the quarter as compared to the March quarter. However, the performance is much better as compared to Q1 of the last financial year when we witnessed a nationwide lockdown. I would share about the physical performance for the year -- for the Q1 FY '22 versus Q4 FY '21. Gas marketing stood at 95.95 MMSCMD in Q1 FY '22 as against 91.37 MMSCMD in Q4 FY '21, increase of 5%. The natural gas transmission stood at 107.66 MMSCMD in Q1 FY '22 as against 109.75 MMSCMD in Q4 FY '21, decrease of 2%. The capacity utilization decreased to 52% in Q1 FY '22 as against 53% in Q4 FY '21. Polymer production stood at 133 TMT in Q1 FY '22 as against 224 TMT in Q4 FY '21, which is a decline of 41%. The decline was mainly attributable to the maintenance activities during the quarter. The plant is now running at full capacity, and we are confident to achieve 100% production capacity on a full year basis. The polymer sales stood at 138 TMT in Q1 FY '22. Similarly, the LHC sales stood at 250 TMT in Q1 FY '22, and LPG transmission stood at 1,023 TMT in Q1 FY '22. Now I would like to give the financial highlights. GAIL achieved gross turnover of INR 17,352 crores in the current quarter as against INR 15,472 crores in Q4 FY '21, increase of 12%, mainly due to increase in the natural gas marketing volume; higher natural gas prices; higher LHC prices, which is around 2,500 per metric ton; and higher petrochemical prices, which is around 4,500 per metric ton. However, this was partly set off due to the lower sales quantity and polymer and marginal reduction in the natural gas transmission volume, which I have already explained. The profit before tax stood at INR 2,054 crores in Q1 FY '22 and as against INR 2,612 crores in Q4 FY '21. The gas marketing segment has shown a robust performance, as it increased to 33%. PBT was INR 1,530 crores in Q1 FY '22 as against INR 1,908 crores in Q4 FY '21. I will talk about the consolidated financial results Q1 versus Q4 FY '21. The turnover in Q1 FY '22 is INR 17,551 crores as against INR 15,677 crores in Q4 FY '22. The PBT was INR 2,540 crores as against INR 3,219 crores, and the PAT is INR 2,138 crores as against INR 2,487 crores. During the quarter, GAIL received 23 LNG cargo from U.S., 14 from Sabine Pass, and 9 from DCP as per the cargo plan. The total 15 cargoes were sold in the overseas market, and the remaining were brought to India either directly or through destination swap. On CGD front, GAIL is supplying gas to all fixed CGDs with infrastructure of 80 CNG stations and more than 136,000 GPND connections with a cumulative CapEx of INR 832 crores. GAIL Gas, which is a subsidiary of -- 100% subsidiary of GAIL, during Q1 FY '22, the gross turnover stood at INR 1,212 crores. If you talk about the CapEx plan, we have, as I have already informed a number of times that we have in the coming 4 to 5 years, we have around 8,000 kilometers of pipelines, which are there and around -- including the JVs and subsidiaries which are associated with GAIL and around INR 40,000 crores of the CapEx which are there. So these CapEx plans are being achieved, mainly on the various pipeline projects. Srikakulam-Angul pipeline, 744 kilometers with an investment of INR 2,700 crores, and the completion is July '22. Dhamra-Haldia pipeline, 240 kilometers, investment of INR 1,200 crores, completion is November '22. Mumbai-Jharsuguda pipeline is 1,755 kilometers, investment is INR 7,800 crores. Gas pipeline in process in the northeastern states, 1,650 kilometers; investment, INR 9,300 crores. Vijaipur-Auraiya, 174 kilometers already commissioned. And Dhamra-Angul, Bokaro-Angul, Durgapur-Haldia, Barauni-Guwahati, all these pipelines which are there are under active execution plan and we are doing. So far as the Pradhan Mantri Urja Ganga pipelines are concerned, our total commitment is INR 14,916 crores, and our actual CapEx is around INR 11,600 crores. We have been receiving the capital grant from the government on regular basis. Until that, we have received a capital grant of INR 4,487 crores. As I have already told, that deal, along with the JV, is executing various pipeline projects of 8,000 kilometers, incurring around INR 38,000 crores to INR 40,000 crores. So far as the CSR plans are concerned, various programs on health and sanitization, education and skill development. So we are doing more than 2% of our profit on the CSR projects. Our plants are -- have run safe, and we have ensured that the safe operation is there. We have 0 major reportable incidents during the last 4 years, and we are monitoring our HSE performance regularly, and all our efforts are being taken. We are also taking various initiatives on the digitization, which -- as satisfaction to the employees as well as the vendors, customers, contractors, suppliers and all, including our retired employees. So we are having various initiatives for satisfaction or for taking care of the stakeholders through our various initiatives. And we have also taken various measures during this pandemic situation and taking various and serious welfare measures to our employees as well as to our retired employees. So that way, 360-degree stakeholder management, we are trying to have. And this was a brief introduction on the financial results and major highlights of the company. I would be happy -- my team is here. I would be happy for your questions, and we will be happy to reply to that. Over to you.

[Operator Instructions] The first question is from the line of Probal Sen from Centrum Broking.

Am I audible, sir?

Yes, yes. Please go ahead.

Yes. Sir, on the petchem, you mentioned that despite the -- obviously, the decline that has happened in this quarter, we are confident of achieving full capacity utilization for the full year. Just wanted to understand, does that imply that for the full year, we should still assume overall volumes to touch close to 800,000 ton despite the shortage in this quarter, sir?

Yes, yes. Every year, there is an annual maintenance plan which we normally take after close of the account here, April, May or June. So in the month of April, we took the opportunity of this pandemic situation. And we also closed our -- I mean we had our maintenance also, regular maintenance also. And that way, we completed our maintenance. That's why the production was less. But we are more than 100% confident to achieve more than 100% of the plant production. We are sure.

Got it, sir. That's very useful. The second question was with respect to transmission volumes. Obviously, we have seen, as you mentioned in the first comment, that the lockdown did impact demand in certain pockets, and there was a small Q-o-Q decline that we saw in volumes for this quarter. Earlier, if I remember, sir, you had given guidance of around, I think, 5, 6 MMSCMD improvements in overall numbers for FY '22. Do you think there is a need to revise that guidance, sir, as of now?

No. Actually what happened, our own volume was up. But besides volume, the volume which are being transported by other entities was less. So that was the reason of the volume. Otherwise, the performance especially the transmission segment was good.

So against 104 MMSCMD that we saw late in FY '21, we still maintain a broad guidance of around 110, 111 average levels for '22.

It will be more than that because our own volumes are getting increased with the coming of fertilizer plants, which are already there and which may consume gradually the volume of around 10 to 12 MMSCMD. So that is going to add the volume, not only in the transmission segment, but also in the trading segment. So that -- we are confident to achieve more than 110.

Great. And sir, one last question, if I may. On the trading front, obviously, the numbers continue to do better given what we have seen of spot LNG prices versus U.S. prices. So in this quarter, that is Q2, I'm seeing that trend has improved even more. Is that a fair way to look at profitability to continue to expand even more from the current quarter level for the trading segment?

It will be much better, yes.

We'll move to the next question. That's from the line of Amit Rustagi from UBS.

Sir, congratulations for such a strong performance despite a very tough operating environment. My question pertains to any update on the fertilizer plants if you have taken. And what is the volume we will do in the Urja Ganga project in this year and next year?

See, the Urja Ganga pipeline projects, our Sindri, Gurapur, these fertilizer plants which are coming up, the volume growth will be around 8 to 10 MMSCMD in a gradual manner. And commissioning of these Gurapur plant, and Sindri plant, and other plants are actively being planned. So in this financial year, it will be 8 to 10 MMSCMD growth will be there.

Okay. And sir, when spot LNG prices have achieved $14, do you think that it helps our petchem profitability as well because we import a lot of natural gas for -- as a feedstock for the petrochemical business? And do we get any benefit for higher LNG prices in our trading business right now? Are we like booking more volumes for the next year? Or do we have any cargoes to be sold for this year?

Number 1 question is your petrochemical pricing, you are concerned. So we do not -- we are not dependent on the spot cargoes or spot prices. We have portfolio mix for full year, and -- which are better for the petrochemical plants. We supply the gas of that portfolio only. So that way we have -- as you know, we have the U.S. volume. We have Gazprom, we have spot also. We have so many sources. So that way, we optimize and we also have that portfolio being used for the petrochemical. With that, I think with the current prices of petrochemicals and with the market condition, we are going to have better realization in the petrochemicals.

Okay. And sir, what about the impact of higher LNG prices on our trading portfolio? Do we get any substantial profitability in this year or next year because of higher JKM prices?

Sure. Sure. Whatever the portfolio is there on the indexation differences as well as the prices which are there, the volumes which are there, the strategy we have, including our destination swap as well as the hedging. Definitely, it is going to increase.

The next question is from the line of Vidyadhar Ginde from ICICI Securities.

My first question is regarding the first quarter trading, gas trading. So I just wanted to ask that in first quarter, you had stated on your last earnings call that some volumes were tied up when oil prices were lower. So was a higher proportion of volume, trading volume, in first quarter tied up when oil prices were lower? And will that proportion reduce as we go from Q2, Q3, Q4?

See, that way, I can't answer your point because each cargo has its own strategy, which has -- which are tied up, which are being sold in the international markets or which are having destination swap as well as so many other things are there. So that way, I can't answer frankly.

Sir, where I'm coming from is…

Let me finish. See, I would like to just inform to all investors, including you, that we'll be doing better as we have done -- that to previous years also, we will be doing better in the gas marketing segment.

Previous year means, sir, when you are announcing -- you were better than your best year, which was FY '19?

FY ending '18 -- '19.

So you will do better than that also you're saying? Okay. So the…

See my confidence output there. But if you ask for cargo wise details…

Sir, my -- what I was trying to understand is that as oil prices were moving up, you must have been more keen to first tie up volumes even when oil prices were somewhat lower for first quarter, but you may not have been in so much hurry to tie up volumes for Q2, Q3, Q4. And that is where my question was, that was a larger proportion of volume tied up when oil prices were, let's say, 54, 55, something -- the futures. And are smaller proportion of volumes in Q2, Q3 tied up when oil prices were low? That was my question. But if you don't want to answer that, that's fine.

I have to answer that. [Foreign Language]

Sir, I am probably one of the most bullish guys for this year and next year if you see my reports. So that is where I'm coming from. So that is where I'm coming from, that the first quarter performance was lower than my expectation. So -- which is where I was trying to understand. I am…

[Foreign Language] Pandemic or other things might have impacted our strategy, could have been hedging, could have been mixed [Foreign Language]. But this quarter, Q2 onwards will be better.

And so the spot LNG spread for Q2, Q3, Q4 is much better, and that's going to help you for -- will that be one of the key factors which will help you do much better in the -- going forward?

Yes.

Lastly on -- so basically, in your numbers, you see you have a gas marketing, #1 in stand-alone and one on console, which in the last 2 quarters, the consol number is higher. So is that what you capture incrementally in consol? Is it your Singapore or other entity -- marketing entities outside India?

Yes, yes, yes. That consol includes that also.

And that is the number one should look at?

Yes.

The next question is from the line of Pinakin from JPMorgan.

My first question is, can you give us a sense of what was the blended gas cost in the petchem business? And how it will trend over the next 2 to 3 quarters because we have a situation where spot LNG prices are surging and could even move higher, and crude is also surging. So I just want to understand the petchem business profitability.

See, with the current prices and as of the portfolio we have, we'll optimize the profitability of petchem.

So sir, the profitability of petchem should stay at these levels or come off because gas prices are increasing and headline steel prices are flat. So volumes will increase. But will the profitability percent improve?

See, we have portfolio -- a mixed portfolio of different gases, different portfolio of sourcing also. That will optimize the sourcing of gas for the petrochemical. From that, profitability will be at the last year level or much better than that. And with the prices stand as we have seen, this 95,000 also per metric ton, are expected to go up.

Understood. Sir, my second question is basically on gas demand in India. Now after 2 to 3 years, the spot gas prices are surging, and we are still not yet in the peak season of taxes. Crude prices are high. Now a substantial part of India's gas demand is met via spot LNG imports. In that context, sir, should we see some kind of progress in India's overall gas demand? And related to that, sir, when you are talking about the fertilizer plant starting up, what is the gas source for the fertilizer plant? Will they be buying spot LNG? Or have they already tied up for crude linked contracts?

See, so far as the GAIL is concerned, we have long-term contracts. We will be giving the gases or the supplies to the fertilizer plants through our long-term contract, which is already there as per the agreement. And so far as spot prices are concerned, spot market are concerned, that we'll see wherever the optimization is there, wherever the requirement is there, we'll do. We have substantial volume, which has been tied up on a long-term basis. So we are not dependent on the spot market. But certainly, we take advantage of the spot prices, better spot prices for optimization of the profitability or selling in the international market or whatever the situation comes.

Understood, sir. And overall, do you think that the gas demand in India could be softer over the next couple of quarters given where spot LNG prices are?

Because these fertilizer plants are coming, CGDs are coming, naturally, the demand is there. So demand for the gas sector is going to increase. That is obvious.

The next question is from the line of Sabri Hazarika from Emkay Global.

So basically, what we understand is that your U.S. LNG is actually a part of your portfolio which is blended with various kinds of gas, and it is sold in India based on certain formula and certain long-term contracts. And this formula is largely [indiscernible]. So in a way, the large portion of your marketing margin is dependent on the difference between oil-linked LNG and Henry Hub link LNG. Is that the right assessment?

No, not fully because then we have also the portfolio, which has contracted volume with our consumers also. So is there also. It's not only the difference between the -- indexation difference between Henry Hub and the Brent link. There are other factors also.

But the formula you are saying will be like different for different customer. It may not be like a vanilla indexation, is that right?

Yes. It depends on the demand and -- but we are optimizing in all the -- wherever is there. We have margins and then we tie up with that.

So considering that Henry Hub prices have gone up significantly in the last 3, 4 months. I think it is at 4.1, 4.2 now. So is it having any impact on your gas volumes in -- volume in gas margins in particular because of -- because of this increase? Or you are like still protected depending on what kind of contracts you have?

Indexation difference is favorable to us.

So you consider the current increase in global gas [indiscernible] to have any adverse impact on the gas marketing capabilities?

No.

The next question is from the line of Varatharajan Sivasankaran from Antique Limited.

So one is GAIL gas, what you mentioned in terms of the number of CNG stations, can you repeat it, sir? And what are the volumes over there currently?

GAIL gas? You are talking about the GAIL gas or our own form CGD?

GAIL gas as well as the CGD. So what is the number of stations you have currently and what kind of volumes are you doing?

GAIL gas, how many? [indiscernible] Yes, yes. So in the GAIL gas, we have more than 675,000 PNG connections and 253 CNG stations. And at present, we are having the total sales more than 5.5 MMSCMD. But it is not only the CNG and PNG. There are other bulk customers also.

And CGD, you mentioned some numbers?

Yes, please?

You have mentioned something about your CGDs, fixed CGDs.

Fixed CGDs, yes. Fixed CGDs, we have around 80 CNG stations, 136,000 PNG connections. And we have invested around INR 832 crores. But since these are -- some of the cities are to be connected through our grid, our GSBD retail grid, once that is connected, more and more volume will increase. So it will take some time.

80 stations is what you mentioned, sir? 8-0?

Yes, 8-0 CNG stations.

My second question is on your LNG offtake contracts with various terminals. If you can share some details as to what is the existing contracts you have.

LNG contracts with the various suppliers, you want to say?

With terminals like in India, the gas terminals with mainly optical engineering.

The gas terminals, [indiscernible]?

Dahej has got 4.5, Kochi is 0.43. And we have one more agreement with Dhamra, and we have -- Dhamra is 1.5 million tons. And Dabhol is going to be a 5 million ton terminal that is fully operated by us, presently it is 2 million tons.

The next question is from the line of Mayank Maheshwari from Morgan Stanley.

Just 2 questions from my end. One was in terms of your LPG volumes, they have recovered very well now. So is it fair to say that most of the gas supply issues of ONGC are largely behind us now? [Technical Difficulty]

We have the management reconnected. So over to you, and we have Mayank Maheshwari in the question queue from Morgan Stanley.

Should I just repeat my question?

Yes, yes. Please, please.

So sir, I was just checking on the LPG volumes. They have recovered very well for you this quarter. So are we kind of thinking that most of the issues that we had from supply from ONGC, that's largely behind us now?

Yes, yes. There is no such means -- you are talking about the LPG or volumes supply from ONGC?

Yes. LPG, liquid and hydrocarbon sales have kind of recovered very well on the first quarter.

Yes, yes. That is sorted out. Okay.

That should now kind of come up at the current run rates now going forward, correct?

Yes, yes. Almost there. Almost there. Nearly there.

Okay. And sir, the second question was more related to your cost on the petchem side because of the maintenance? And can you just kind of help us understand what would be the potential cost that you booked in for this quarter on petchem?

Potential cost related to maintenance?

Yes. Any cost that you booked in this quarter which is extraordinary?

No, no. That is routine type of maintenance is there. Annual maintenance always -- plant maintenance are there. That is always there. Any major cost is not there. It is routine type of maintenance, oil and other fleets, which are there. And many equipment have to be repaired, something like that. There is no major one-off.

The next question is from the line of Puneet from HSBC.

Sir, can you give some color on what is the status of the 4 fertilizer plants, which are like to be commissioned and to draw cash from you?

So far as the 4 fertilizer plants are there, these are -- yes, yes. So about the Ramagundam fertilizer, which is already commissioned, HURL Gorakhpur plant is ready. And the volume is 1.87 MMSCMD, and they will take full volume by end of this year. HURL plant is ready. Pre-commissioning activity is under progress, and the volume is 1.87 MMSCMD. HURL Sindri, again, the plant is ready. And they will take full by May '22, and pre-commissioning supply will come in, in this month only. These are the status of these 4 fertilizer plants.

So cumulatively, how much are they taking right now? And what would they take at peak?

Total will be -- peak will be 10 to 12 MMSCMD, gradually could increase. But by May '22, I think full volume will come.

And currently, how much should we add up to all these, sir?

Currently, taken together, 2.5, around 2.5.

My second question is, sir, if you look at the total gas amount for the country, ex of these new fertilizer plant and the new CGDs, do you foresee this demand going down? Or do you think the demand for gas -- there is enough appetite to take additional gas even with higher prices?

So demand will be up, certainly 6% to 8% or 8% to 10% growth will be there, I expect, with the coming CGDs which are there, with the coming fertilizer that I have already told.

Excluding the new sources of demand.

What you are telling is that because LNG prices have gone up, the demand -- would the demand still grow. So…

Are you seeing any discussions with your customers?