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

Good day and welcome to the GAIL (India) Limited Q2 FY '24 Earnings Conference Call, hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Harshavardhan Dole from IIFL Securities Limited.

Greetings, everyone. On behalf of IIFL Securities, I welcome you all for GAIL's 2Q FY '24 Earnings Call. To discuss the results in detail and share the performance outlook, today, we have the management team of GAIL, represented by Shri Rakesh Kumar Jain, Director, Finance; and other senior executives. I'd request Director, Finance, GAIL to make an opening remark, subsequent to which the floor will be opened for Q&A. Over to you, sir.

Thank you, Harsha -- Mr. Harsha, from IIFL Securities. My colleagues, dear friends from investors and analysts community, a very good afternoon to all of you and welcome to GAIL's earning call for Q2 financial year '24. At the outset, I thank you all for attending this earning call. I will briefly touch upon the major highlights for this quarter, and then we can have an open session for your questions. GAIL results for quarter ended 30th September 2023 have been declared today. Gross turnover for the quarter stood at INR 31,729 crores. Profit before tax stood at INR 3,130 crores, and there is an increase of 56% over the previous quarter. And if we talk of profit after tax, profit after tax stood at INR 2,405 crores and here also an increase of 70% over previous quarter. If we talk on consolidated basis, GAIL clocked a turnover of INR 32,952 crore in Q2 financial year '24, as against INR 32,755 crores in previous quarter, hence marginally up by 1%. Profit before tax is up by 37% to INR 3,138 crores, as against INR 2,283 crores. And profit after tax was up by 36% to INR 2,444 crores, as against INR 1,792 crores. The capital expenditure for quarter 2 financial year '24 is INR 2,462 crores. And this capital expenditure is mainly on pipelines, petrochemical, city gas distribution projects, operational CapEx, others and equity contributions. Now I would like to share performance highlights of Q2 financial year '24. GAIL gross turnover stood at INR 31,729 crores in Q2 financial year '24, as against INR 32,138 crores in Q1 financial year '24. There is a marginal increase, 1%. And this marginal increase is due to -- and basically, there is a mix of issues. There is a decrease in gas volumes and decrease in natural gas price and LPG price. These are the reasons for minor decrease (sic) [ increase ]. The profit before tax during the quarter increased to INR 3,130 crores, as against [ INR 1,899 crores ] in Q1. As I told you, there is upside of 66%. And this upside is mainly on account of better gas trading margins, increasing natural gas transmission volume, decrease in fuel costs in natural gas compressor. If you remember, last quarter, we said there is a one-off because we were carrying the inventory of last year, the higher-cost-purchase inventory, which we booked in quarter 1 as well. Further, there is a dividend income in this quarter, INR 270 crore. Normally, we don't receive dividend in Q1 and it starts coming from Q2. The profit after tax during the quarter increased to INR 2,405 crores, as against INR 1,412 crores; and here also increase of 70%. And reasons are same. Physical performance for the current quarter as against previous quarter. Total gas marketing volume was 96.96 MMSCMD, almost 97 MMSCMD, in quarter 2, as against 98.84 MMSCMD in Q1 financial year '24. And the decrease in volume, the almost 2 million volume -- has gone down due to decrease in overseas volume. Now what is happening? There is an increased demand in domestic market, so the international trade which we used to do has gone down by almost 5 MMSCMD. And there is an increase in demand in domestic market. So that was around 3 MMSCMD, so there is a net of -- impact of 2 MMSCMD, but good sign is that there is a demand increase in domestic market. Natural gas transmission volume increased by 4 MMSCMD to 120.31 MMSCMD in Q2, as against 116.33 MMSCMD in Q1. If you talk of average pipeline capacity utilization, the pipeline capacity utilization was 58% in the Q2 financial year '24; and the reason are same. There is an increase in demand in domestic market. Therefore, pipeline utilization has also gone up. Polymer production is almost flat, 160 TMT in Q2, as against 164 TMT in Q1. And our capacity utilization was approximate 79%. Liquid hydrocarbon production was also almost flat, 238 TMT, as against 243 TMT in previous quarter; and capacity utilization was 67%. LPG transmission was 1,114 TMT, as against 1,073 TMT in previous quarter. And here, capacity utilization was 97%. Now consolidated financial numbers. The consolidated turnover in quarter -- current quarter stood at INR 32,952 crore versus INR 32,755 crore in Q1. Profit before tax in current quarter is INR 3,138 crores, as against INR 2,283 crores in Q1. PAT is INR 2,444 crore versus INR 1,792 crore in Q1. Now I will share GAIL's [ CGD ] performance. As you know, that GAIL is having 6 geographical areas directly with GAIL. So in these 6 geographical areas, we have infrastructure of 157 CNG stations, 2 lakh 74,000 domestic PNG connections. During the current quarter, 3 new CNG stations and 5,500 number of new DPNG connections were added. Physical volume was 0.3 MMSCMD. And in terms about future plan for CGD, we target to add in GAIL, I am repeating, in GAIL CGD 6 geographical areas, 100 new CNG stations and almost 2 lakhs new DPNG connections. I will also take you through the GAIL Gas performance. Gross turnover stood at INR 2,745 crore, as against INR 2,192 crores in Q1 financial year '24, increase of 25% mainly on account of increase in bulk trading quantity by 47% and CNG quantity by 7%. PBT has gone down. I will explain the reason. PBT has gone down to INR 57 crore, as against INR 102 crore; and there is one-off. Actually, all the employees from GAIL are on deputation to GAIL Gas. And in terms of recent supreme court decision, GST is required to be levied for the service provided by GAIL in terms of manpower supply to GAIL Gas, so we booked the INR 76 crore of GST implications since 31st March '23; and for Q1, INR 4 cores. So this is one-off which has happened during this quarter. Profit after taxes stood at INR 42 crore, as against INR 76 crore. And this is -- there is a decrease of 45% and the reasons are same. Physical volume increases to 6.55 MMSCMD in Q2 financial year '24, increase of 35% mainly on account of, as I said, bulk trading quantity, 47% increase in bulk trading; and CNG quantity, by 7%. During current quarter, 18,799 new DPNG connections were added and 6 new CNG stations were also added. GAIL Gas, along with its JV subsidiaries, has infrastructure of almost 8.9 lakh DPNG connections and 462 CNG stations. We have another subsidiary, Bengal Gas. As of 30th September '23, Bengal Gas is having 12 CNG stations, approximate 215 kilometer of pipeline and 8,000 number of domestic PNG connections. I will take you through the project performance. Mumbai-Nagpur-Jharsuguda pipeline: The pipeline is a 1,755 kilometers long pipeline. Activities are in full swing. And first, the section Mumbai-Nagpur-Jharsuguda of this pipeline, which is of almost 698 kilometers, we expect it to be completed by June '24. Regarding Jagdishpur-Haldia-Bokaro-Dhamra pipeline, this pipeline [ is ] length of 3,289 kilometers. Out of the same, 2,922 kilometers of pipeline have already been commissioned, and remaining part is expected to be completed progressively by June '24. Srikakulam to Angul mainline, length is 420 kilometers and likely to be completed by the end of this calendar year. Gurdaspur-Jammu natural gas pipeline, having a length of 160 kilometer, likely to be completed by July '26. As you know, this pipeline has recently been authorized to GAIL, so pre-project activities and the project-related activities have started. Dhamra-Haldia pipeline: Odisha portion of length of 150 kilometers is expected to be completed by the end of this calendar year. The other projects. PDHPP Usar, as you know, the capacity of this project is 500 KTPA. Project cost is INR 11,256 crores. And we expect this project to be completed by April '25. [ 60,000 KTPA ] PP projects at Pata: Project cost is almost INR 1,300 crore. We expect this project to be completed by July '24. IPA at Usar, capacity is [ 50,000 KTPA ]. Project cost is 530 crore. Completion, we expect by December '25. As you also know, that GAIL has acquired JBF Petrochemicals. Now it is known as GAIL Mangalore Petrochemicals Limited. Capacity is 1,250 KTPA. Project cost is 4,200 crore. The activities related to the commissioning of project completion date is -- are on, and completion date is by March '25. Now I would like to also share our future outlook for gas marketing, gas transmission. So -- and gas marketing business, as you know, is showing robust performance. This is quite visible from the volume ramp-up and margins in the marketing activities. This gives us confidence, as informed earlier during various calls, meetings with investors and analysts, that whatever happens -- we said in analysts call also during this year, annual analysts call in May at Bombay, whatever happens, we will be able to earn at least INR 3,500 crore of gas marketing margins. And now it is evident from the H1 '24 results. By that H1, we have already earned [ INR 4,700 crore ], so we will be meeting this target. And not only, we'll be surpassing this target. In terms of the future outlook of gas marketing, let me share you we expect at least to earn INR 4,000 crore as a marketing margin next financial year. As we said regarding '22 -- '23, '24, now we have estimated that, in next year, we'll earn at least INR 4,000 crore. Gas transmission volumes for '23, '24 is expected to be 120 MMSCMD. We have been telling you; or sharing in various earning calls, various analyst meets and interactions that, last year, volume was 107. We will end up this financial year with an average volume of 120. And we also expect to exit at the rate of 123 to 124. In next half year, we -- I think this what -- I was here. So this year, we are expecting an increase of almost 13 million on an average basis. [ And when we add by ] almost 16 million, exit will be higher by 16 million. Polymer production, as I shared, stood at 160 TMT, as against 164 TMT in last quarter. This quarter, I'm talking of quarter 2, we have been able to reduce losses in petrochemicals segment by optimizing and minimizing, whatever they say, in cost of input gas for petrochemicals plant. In H2 of financial year '23, '24, we plan to further optimize our sourcing; and aim to close the year, if not break-even, nearer to break-even level. Further, starting next financial year, we have to normalize our petrochemical operations with a positive bottom line. Liquid hydrocarbon production stood at 481 TMT in H1 financial year '24. And during the year, production is estimated at the same previous year production level of almost 950 or 930 -- 930 to 950. Also, to protect the margin [indiscernible], as we shared in various earning calls, we have also started taking positions in financial markets. And we are doing, in a -- maybe in a smaller way, hedging of LPG prices. I think I've tried to cover up the Q2 financial and H1 financial results; and also the reasons for various increase, decrease and changes in profitability; and also future outlook from my side. Now I will hand over back to you, Harsha, for open session.

Thank you, sir. Rohit, can you open the session for Q&A?

Yes, sir.

Thank you.

[Operator Instructions] The first question is from the line of Maulik Patel from Equirus. Maulik Patel has dropped down. The next question is from the line of Probal Sen.

Congratulations on a strong set of numbers. I just had a couple of questions. One, with respect to the LPG and petrochemical prices which have been subdued over the last couple of quarters, now we have also seen Asia propane prices starting to recover from the last few months. Just wanted to understand that when should we expect to see the impact of the slightly better LPG prices or propane prices in our numbers. Does Q3, so far, look much stronger compared to Q2? And similarly, in terms of petrochemicals, there is an element of oversupply in the near term that is developing because of additional commissioning of HMEL's plant and other capacities coming on stream as well, so how are we looking at the pricing scenario, given that we are also making significant investments in adding to our petrochemical capacities in next 3 to 4 years? Just these 2 questions. And the last question was with respect to the trading run rate. I know you have often said this before, that predicting a run rate is very difficult, but what sort of EBITDA run rate should we work with for the second half given that the number this quarter has definitely beaten [ seed estimates by a wide mark ]? That's all for me.

Thank you. I think, your question, largely on the LPG and petrochemical prices. Yes, the LPG prices in Q2 were really abnormally lower. We also not -- and we didn't -- rather I must say it's a rare occasion that our [indiscernible] for Q2, which we have also not witnessed in past [indiscernible] started moving up. And we expect the significantly better performance during the remaining part of the financial year. With respect to questions of petrochemical, yes, the prices of petrochemicals are under tremendous pressure. We are also witnessing those pressures, but we have ability -- this is not -- this is beyond our control. The market price will be what market is. Nobody can control on -- the market, but when we have an ability to source the gas at a cheaper and best optimal price for petrochemical plant at Pata, which we have been doing -- and the results for quarter 2 is the [ testament ] of that, that we have been able to reduce our losses to a great extent. What we expect in coming quarters or remaining part of the financial year, that we will be able to source gas or provide gas to our petrochemical plant at a price which gives a significant change to the financials for petrochemical plant. Thank you.

So just a follow-up, if I may. So with respect to the petrochemical plant then, can we expect a pickup [indiscernible]...

Actually, your voice is not coming very clearly. I have some of...

Sir, is this better now, sir?

Yes.

Yes. I was asking, sir. It's a follow-up in terms of petrochemical volumes then. Can we expect a gradual pickup in terms of volume run rate for the next few quarters?

Yes, yes. If you see, that this quarter, of course, we were almost at the same level at what we were at Q1, but if you see, any way is better because it's a festive season. And this time, this -- during this particular quarter, anyway, demand picks up, so that will be one positive point. And second positive point is that, since we are able to source now a reasonably good priced gas, we have an ability to produce more and sell more. And maybe in terms of pricing, we may be competitive because we will have more leverage to do that, so I think we'll try to pick up [ and enhance ] our productions in remaining half of the financial year.

The next question is from the line of Nitin Tiwari from PhillipCapital.

Sir, my question also relates to the petrochemicals segment. Just wanted to understand that why we have not been able to ramp up our production after the decline we saw last year because of high gas prices. So gas prices have more or less normalized. The LNG prices are not as high, but the -- our utilization levels continue to be low on the petrochemicals side. And secondly, if you can help us with the breakup of the cash costs in terms of what percentage would be the cost of gas and what percentage would be the operating cost. So just wanted to understand that.

Okay. One, you're right that the input gas prices have significantly gone down, if you compare with the last financial year, but if you see in terms of petrochemical prices, the average price has gone down by at least INR 20,000 per metric ton if you compare with last financial year, which is a point which is a matter of concern for us but beyond control. So as I was answering for the questions, for the participant before you, that the controllable thing to some extent we have is we have ability, being one of the largest player, gas player, in the country, to source significantly good-priced gas to petrochemical plant. And that's what we have been doing. Q2 is the [ testament ] of that, that we have been able to reduce the losses. And in second half, we'll continue to do that. And in terms of capacity utilization, yes, we will be ramping up our production in remaining half of the financial year. And in first half, why we could not do, because there was a lot of pressure on prices. And inventory hold-up was there. Market was actually a depressed market in Q1 and also to some extent in Q2. So market, while also not picking up, inventory holding up was there. Now at least to a large extent, that situation is over, if not fully over, so we hope that in financial year second -- this current financial year, second half will be better off, as compared to half -- first half.

Sure, sir. And a breakup of the operating cash costs in terms of what percentage would be the cost of gas and what percentage will be operating costs...

[ Actually we ] -- anyway, this can be worked out from the financials, but we will be able to give you offline. I don't have that data available readily. We will share to you to the extent we can.

And lastly, sir, before I let you -- sir, are we also holding up any inventories? I mean, is there a difficulty in pushing the product in the market, as far as petrochemicals are concerned? Or we don't have any inventories at our end.

[indiscernible] -- we have inventories. We have inventories. A good amount of inventories, we have, but we don't have inventory like we had in Q1. We have -- actually -- we actually -- some inventory, you have to maintain, but this time, we have inventory of 45,000 to 50,000 metric tons. But this, like, inventory has significantly come down which was higher in Q1, so -- and even in some part of Q2. So inventory holding is reducing. Slow by slow, market is picking up. Prices certainly are pressured, but in terms of demand, market is picking up.

The next question is from the line of Amit from UBS.

My question relates to the city gas distribution businesses which we have. So we have 3 formats where we have few city gas licenses under GAIL. We have few joint ventures. And then we have listed investments like IGL and Mahanagar Gas. Sir, do we have any plan for any value creation in these businesses by integration, reverse merger or any other modes going forward in the next 1 or 2 years from here?

Yes, Amit, actually, we are regularly discussing at various levels about this, your question, whether to reverse-merger; or whether to shift the geographical areas which we have [ gas all to ] GAIL Gas and then we list GAIL Gas. Secondly, this is in our mind. We are discussing on a regular basis, but I -- it is difficult to give a time line, but certainly, I can say at that point of time we are discussing and take -- once we take this call, we'll come back to you, but this is in our radar.

Okay, sir. And do we have any other view on merging this JBF plant with us so that we have better integration with the existing petrochemical facilities? And do you see any economic sense of cost or other benefits for merger of these entities which are currently separately into other entities?

[ Yes, but definitely ] we have these issues in our hands, not only JBF. We are also thinking about KLL. We are regularly discussing this. We have a certain time line in our minds that we are taking the action in this regard that -- should we merge this JBF and also, at some point of time, KLL to GAIL.

Okay. And sir, last one, just on the dividend or the buyback. So we have come back very strongly with very strong profit numbers. And as you mentioned, second half is also looking promising and next year is also looking promising, so any plans for any buyback or a good dividend payout for the shareholders?

This is a Board's call. It is very difficult for me to give anything, but you can historically see us. What is our payout ratio? We have been giving dividend estimates of -- in the 45% -- payout ratio in 45% to 50%, and that is our track record. And you can vouch for yourself. And I think GAIL as a company is rewarding to its shareholders. And as the management [ talks ], we'll continue to do so. Any number for me, giving me number will not be fair. And I cannot give because it's a Board call. Regarding buyback, we have done buyback for almost consecutive 2 financial years. At -- but at the moment, nothing is in our mind, but anyway, because again it's a Board call, we'll come back to you once Board deliberate and decides to do something.

The next question is from the line of Ramesh from Nirmal Bang Equities.

Sir, if you're looking at our core gas business, both transmission and marketing, how do you explain the kind of strong margins in gas marketing? [ Because ] about INR 1.8 per cubic meter, if you do a "back of the envelope" calculation, so -- and what is the kind of visibility you have in terms of the unit margins? Assuming a certain marketing volume, what is the kind of predictability we can assess for the marketing segment?

If I understood, you asked 2 questions. One is the historical what are the reasons why -- how we are -- we have been able to earn so much. And what is the predictability, right?

Yes.

Yes. So with respect to your question how we have been able to do that. And one more dimension I will add, that we have been now predicting also what kind of marketing margin we'll earn in coming years. We have portfolio of 14 MMTPA of LNG in our fold. And a great part of this portfolio, a major part of this portfolio, we have sold on back to back. When I say back to back, back-to-back index, not the margin part of it. And some part of it, we have kept open for ourselves. Second thing which I will tell you, we have the FOB contract [indiscernible] which is a significant portion of our portfolio, almost, [ you can see, 5.8 ] million tonnes. And when we have FOB-based contract with us, we have ability to reduce transportation charges through various mechanisms. One of the mechanism is destination swap, wherein we swapped our cargoes which are available at United States with the cargo which are required to bring to India. And in this particular quarter, let me give you data. We have been able to reduce our cost of gas by $8, which straightaway goes to my profit, as compared to Q1. Second, we have -- whatever portfolio we have kept open, we have ability to financially [ have ] those, which we have been sharing with you. And we have continuously been doing, taking positions in financial markets; and are able to not only maintain our profits but are able to take advantage of the market situation and increase our marketing margin, while we want to remain competitive in the marketing -- gas marketing segment, but these various measures have been able to provide good dividend to us. And that's how we have been able to perform better. That is one thing. Regarding future. I said to -- in the answer to questions by one of the participants -- and let me give with historical data. Now for last 2 years, we have been predicting our marketing margin. We said, last year, '22, '23, whatever situation happens, we'll earn at least INR 3,000 crore. This year, last year's analysts meet in May, we said, this year, whatever situation happens, we'll earn at least INR 3,500 crore. And we have demonstrated that even -- the worst kind of situation of Ukraine war last year. And I also said in answer to the question by [ one party ], that next year, we expect that at least we should earn marketing margin of INR 4,000 crore. And whatever we have been saying, you can vouch for yourself we are able to not only achieve our better [indiscernible] performance. That's a future visibility about marketing margins.

Okay. As a follow-up question, in terms of the gas transmission volume, particularly in the JHBDPL pipeline, where are we in terms of the completion of the entire JHBDPL pipeline? And when do you see that ramp up to a full capacity utilization in the -- say, in the next 2 to 3 years?

Yes. So in terms of completion, I said in opening remarks that, this pipeline, we expect to be commissioned by '24 fully, progressively. Last leg will be completed by June '24. In terms of capacity utilization, this pipeline is one of the significantly highest-utilization pipeline because we expect at least 7 million to 10 million volumes from refineries along the pipeline, the city gas distribution in additional. This pipeline will also cater to the Northeast, including NRL refinery. We are in discussion with various consumers to take the gas along this pipeline, so whatever portion we have commissioned, it is getting largely utilized. And we expect this pipeline to be utilized. This is one of the highest-utilized pipelines at the moment. I can say so.

Let me just squeeze in one more question. You mentioned something in the opening remarks about the cost savings [ in the compressor ] costs, so how much is the savings...

[indiscernible] -- sorry...

You've made a reference to the costs in the gas used in the gas compressors for your transmission business. What will be the savings you would have achieved in the second quarter or first half? And is that something one can expect to sustain in future?

It is not savings. Actually, there was one-off in quarter 1 because we were carrying the costly gas inventory in our portfolio which we purchased last year. It was more than INR 200 crore of extra costs we booked during quarter 1, which is not there in quarter 2 because now we know for sure that our allocation has been reduced. So we have been sourcing this gas from domestic market which is significantly cheaper, as compared to the -- last year's price which were hit by Ukraine war. So the -- so if again to summarize answer to your question: Last quarter, we booked more than INR 200 crore in extra costs to fuel, which is not there in this quarter.

If I may just ask a last question, in terms of your discussions with the regulator. You were talking about getting back some of the costs you incurred last year in terms of additional costs for the imported LNG for your compressors. How is that progressing? Is there any visibility in getting a refund from the regulator this year or next year?

Yes. So before giving answer to your question, first, as analyst -- let me just get you recap. The regulator has allowed us gas price of $3.61 per MMBtu for consumption in compressor fuel, which is [ nonexistence ] price because this is not even APM price. Last year, we -- in this situation when all of sudden the allocation was cut, we used significantly higher price. Even during this year, the domestic price is almost $10, $11, depending on the time. So this deficit, we have demanded from the regulator through tariff increase, for which we filed the petition immediately after issuance of tariff order. This review petition has been listed for hearing in November. We expect that regulator will take a call on immediate basis because we also -- during discussions to them, we said that, "If you delay it, it has an impact on NPV basis." Our tariff will further increase, so in the larger interest of everybody, this should be taken of -- on priority basis so that we get our desired return and get back the money which is incurred. And it does not impact the interest of consumer as well.

The next question is from the line of Kirtan Mehta from BOB Capital Markets.

Would you be able to share light on how do you see your gas transmission and marketing volume ramp-up into FY '25? Would you be able to give some color there?

Sure, sure. We expect our volume -- marketing volumes to go up by at least 6% to 7% next year. And transmission volumes, which I said that we will end up by 120 on an average basis this year, will likely to increase by 12 MMSCMD in financial year '25. That means it will -- we will be having an average transmission volume of 132 to 133.

Could you also sort of give a bit more color in terms of where do we see this volume growth coming from?

Yes. So this volume [ growth ]. Largely, you see the consumption of gas in domestic market is increasing. We have an infrastructure which caters to 70% of the country's gas requirements. So first, volume, which is very, very visible to everybody, comes from city gas distribution, which has a double-digit increase of almost 12%. So 4 million to 5 million volume increase is there. Even if on crude basis you take 70%, 3 million comes to our transportation, in perspective. As I said in another answer to another question, that there are refineries along Jagdishpur-Haldia pipeline. There is -- and Dhamra terminal has already commissioned. There are various offtakers at Dhamra terminal. They have booked the capacity. If wherever -- say they take the volume. The pipeline belongs to GAIL. 7 million to 10 million volume is likely to come from there. There are various steel plants. There are various other refineries. And there are another upcoming pipeline which GAIL are -- GAIL is constructing, are going to be commissioned, so all these likely to bring these volumes to our fold. And that's how we'll reach to 132.

One follow-up question on the gas marketing margin, where we are sort of continuously increasing our predictability, from INR 3,000 crore to INR 3,500 crore, to INR 4,000 crore. Is this primarily sort of improvement coming from our ability to reduce the cost of gas from the destination swap? Or are there any other levers that are at play? Because volume per se has remained more or less same, so where are we actually seeing this increase coming from?