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

Ladies and gentlemen, good day. And welcome to Q3 FY '24 Earnings Conference Call of GAIL (India) Limited, hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Probal Sen from ICICI Securities. Thank you. And over to you, sir.

Thank you, Aditya. Thanks, everyone, for taking the time out on back-to-back calls to attend the -- GAIL's Post-Q3 FY '24 Results Call. We have with us from the management Shri Rakesh Kumar Jain, the CFO of the company, along with other members of the senior management of GAIL, so without further ado, I'll hand over to the management for their opening remarks. And then we can get into the Q&A. Sir, over to you.

Thank you, Probal. And a very good afternoon to all of you. I have with me my colleagues from various departments who are heading critical department, like sourcing, marketing; and colleagues from finance. Once again, good afternoon and warm welcome to GAIL's Earning Call for Q3 Financial Year '24. At the outset, I thank you all for attending this earning call. GAIL's result for quarter ended 31st December 2023 have been declared today. I will touch briefly on the major highlights for quarter, and then we can open the question-and-answer session. GAIL's gross turnover increased by 8% to INR 34,168 crores in Q3 financial year '24, as against INR 31,728 crores in Q2 financial year '24. The major reasons for the increase is the robust physical performance by all the major business segments of GAIL. This quarter witnessed increase in natural gas prices and better realization in liquid hydrocarbon segment. Profit before tax during the quarter increased to INR 3,694 crore, as against INR 3,130 crore in Q2 financial year '24, and this is up 18%. This is mainly due to increase in LFC (sic) [ LHC ] price realization, higher petrochemical sales, improved gas marketing margins and reduction in input gas costs for petrochemical segment. Further, during this quarter, we received higher dividends, as compared to quarter 2. We received INR 403 crores, as against INR 270 crore in quarter 2 financial year '24. Profit after tax during the quarter increased to INR 2,843 crore, as against INR 2,405 crore in Q2 of financial year '24. That is up by again 18%, and the reasons are same as I enumerated for profit before tax. If we talk of 9-month basis. GAIL clocked the turnover of INR 98,034 crore, as against INR 1 lakh 11,290 crore in corresponding period of the last year. And there is a decrease of 12%, and this decrease is mainly due to decrease in gas prices as compared to last -- 9 months of last financial year. However, this is partly offset by an increase in transmission tariffs; volumes in natural gas marketing, natural gas transmission and petrochemicals. There is an increase in profit before tax by 45% to INR 8,713 crore, as against INR 5,993 crores; and PAT by 42% to INR 6,660 crores, as against 4,690 -- INR 4,698 crores. Physical performance, if I were to share with you. Total gas marketing volume was 98.14 MMSCMD in Q3, as against [ 96.96 crore in -- 96.96 MMSCMD ] in Q2 financial year '24. This increase is mainly due to increase in volume, overseas volume. Natural gas transmission volume was 121.54 MMSCMD in Q3, as against 120.31 MMSCMD in Q2. The average capacity utilization was 58%, approximately. The increase in transmission volume is attributed to increase in [ shippers' ] volume by approximate 1.26 MMSCMD. Polymer production increased by 45 TMT to 205 TMT in Q3 financial year '24, as against 160 TMT in Q2. Capacity utilization in last quarter, that is Q3, was 101%. Liquid hydrocarbon production was 249 TMT, as against 238 TMT in previous quarter. The capacity utilization was 69%. LPG transmission was almost flat. That is 1,095 TMT, as against 1,114 TMT in previous quarter. And capacity utilization was 95%. The consolidated financials for Q3 as against Q2. The consolidated turnover in the current quarter stood at INR 34,678 crore versus INR 32,952 crore, up by 5%. PBT in the current quarter is INR 4,075 crore versus INR 3,138 crores in Q2, up by 30%. Profit after tax is INR 3,195 crore versus INR 2,444 crores in Q2. That is up by 31%. On 9-month basis, consolidated financials. The consolidated turnover for 9 months in financial year '24 stood at INR 1 lakh 385 crore versus INR 1 lakh 12,445 crores in the corresponding period in previous year. The profit before tax for 9 months in financial year '24, up by 45% to INR 9,496 crores, as against INR 6,567 crores in corresponding period of previous year. Profit after tax, up by 49% to INR 7,431 crore for 9 months in financial year '24 versus INR 4,982 crores in corresponding period for the previous year. Now I'll share the performance of GAIL's CGD. GAIL is having infrastructure of 165 CNG stations and 2 lakhs 90,000-plus DPNG connections in the 6 GA allotted to GAIL. During the current quarter, 8 new CNG stations and approximate 16,000 DPNG connections were added. The physical volume is 0.3 MMSCMD during the quarter. In the next 2 years, GAIL targets to add over 100 new CNG stations and approximate 2 lakhs new DPNG connections. I will share now the performance of GAIL Gas. During the current quarter, Q3, financial year '23, '24, turnover stood at INR 3,145 crore, as against INR 2,745 crores in Q2 financial year '24. That is increase of 15% mainly on account of increase in bulk trading quantity by 12%, CNG quantity by 11%. Profit before taxes stood at INR 153 crore, as against INR 57 crore in Q2 financial year '24. There is increase of 168%. Profit after taxes stood at INR 113 crore, as against INR 42 crore in Q2 financial year '24, increased by 169% for reasons as explained ago -- as explained. The physical volume increased to 7.18 MMSCMD in Q3 financial year '24, increase of 10% mainly on account of increase in bulk trading quantity by 12% and CNG quantity by 11%. During current quarter, GAIL Gas, along with JV subsidiaries, has added 17,731 new DPNG connections and 29 CNG stations; and having infrastructure of 9 lakh 6,000 DPNG connections, GAIL Gas as a group company. If I were to talk about GAIL Gas, GAIL Gas has almost 5 lakh of DPNG connections. Bengal Gas Company Limited. As on 31/12/23, BGCL is having 13 CNG stations. 237-kilometer pipeline and 8,000 numbers -- of domestic PNG connection infrastructure is made available. During the current quarter, [ 1 new ] CNG stations and 22-kilometer pipeline were added. Project performance. Mumbai-Nagpur-Jharsuguda pipeline activities are moving in full swing, and pipeline is anticipated to be completed by October '24. Jagdishpur-Haldia-Bokaro-Dhamra pipeline: Out of 3,289 kilometer, 2,951 kilometer pipeline have been commissioned; and remaining part is expected to be completed progressively by June '24. Srikakulam-Angul main pipeline that is of 420 kilometer. Work is under progress and likely to be completed by June '24. The spur lines are anticipated to be completed by September '24. Gurdaspur-Jammu natural gas pipeline, this pipeline having a length of 106 kilometer -- and is likely to be completed by July '26. Dhamra-Haldia pipeline, length 253 kilometer: The work is under progress and expected to be completed by June '24. PDHPP at Usar, as you know, capacity of this plant is 500 KTA, is expected to be completed by April '25. PP at Pata, capacity at 60,000 KTPA (sic) [ 60 KTA ], expected to be completed by July '24. IPA at Usar, 50 [ KTPA ], expected to be completed by December '25. GAIL Mangalore Petrochemicals Limited, capacity 1,250 KTPA, completion date by March '25. CapEx for Q3 financial year '24 is [ 1,730 crore ], mainly on pipelines, petrochemicals, CGD projects, operational CapEx and others. Now I would like to share some segmental outlook for short to medium term. So far in the financial year, our gas marketing business has exhibited robust performance. In earlier conference call, we have -- we had given a guidance that, no matter what, GAIL will be able to earn at least INR 3,500 crore as a marketing margin from gas marketing segment during financial year '23, '24. In 9 months period ending 31st December '23, due to better arbitrage; various optimization measures like time swaps, destination swaps and shipping optimization, we have already earned gas marketing margin of INR 4,300 crore, which has surpassed our earlier guidance. With these revised numbers, our gas marketing margin is expected to exceed INR 5,500 crore mark by the end of this financial year. In the similar way, we believe that the gas marketing spread for '24, '25 will be around INR 4,000 crore; and for financial year '25, '26, will be around INR 4,500 crore. And that will be minimum we expect to earn. Gas transmission volume for financial year '23, '24. We -- it is expected to be 120 MMSCMD on an average basis. I'm talking of yearly average. And we also expect, when we close this financial year, we'll be having exit rate of at least 123 MMSCMD, 124 MMSCMD. In this regard, I would also like to inform that -- to my investors community that, in Q3 financial year '24, average transmission volume stood at 121.5 crore -- 121.5 MMSCMD. That is up from 120.31 MMSCMD in Q2 financial year '24. In next quarter, we expect to transmit slightly higher volume, so as to reach an average of 120 MMSCMD for full financial year. Further, during next 2 to 3 years, there will be increase in transmission volume by 12 MMSCMD to 15 MMSCMD [ on a year-on-year basis ]. Polymer production stood at 205 TMT, as against 160 TMT in last quarter. In this quarter, we were able to post a PBT of INR 62 crore, as against loss of INR 160 crore. As we have been mentioning to our analyst community, that we expect, when we end this financial year, we'll be around at break-even level on a yearly basis for petrochemical at Pata. This has happened due to optimization of costs, input gas costs; improved operational efficiency because we are able to run the Pata plant at more than 100% capacity. Further, in Q4 of financial year '23, '24, we plan to optimize further our gas sourcing and likely to -- as I said, likely to close at break-even level. For next financial year [indiscernible] not only normalize petrochemical operations, but we expect to earn a reasonable profit from Pata petrochemicals. Liquid hydrocarbon production stood at 730 TMT during 9 months of financial year '24. And during Q3, we were able to post a PBT of INR 257 crore, as against loss of INR 17 crores in Q2 due to better price realization. In financial year '24, production level is estimated to be slightly higher, as compared to previous years. Also, to protect our margins in this segment, GAIL is effectively involved in taking hedging for LPG products. I think that's all from my side regarding the overview of performance of -- performance and project status. Now I invite you to have any clarification and questions on the results for Q3 and 9 months ending December 31, '23. Thank you. Over to you, Probal.

Thank you, sir. Aditya, can we open up the queue for question-and-answers?

[Operator Instructions] Our first question is from the line of Puneet Gulati from HSBC.

Congratulations on great numbers. My first question is on your guidance for FY '25. Why are you guiding for lower marketing margins for FY '25 versus '24? Or are you just being conservative?

Puneet, we have shared the minimum marketing margin which we are likely to -- or we also -- for this year, if I were to share, we said that we earn at least INR 3,500 crore. So we are saying this will be minimum which we expect to earn. And then based on the market situations, the arbitrage available, the optimization we are able to do, we may [ better off ] than this, but for guidance purpose, we are considering a number of INR 4,000 crore.

Understood. So it's fair to assume that there is 100% probability of a INR 4,000 crore marketing margin.

That's what we expect.

Okay, [indiscernible]. Secondly, if you can also talk a bit about what's driving the improvement on the petrochemical side. It was a decent improvement. What is the optimizations that you're doing that you talked about in your opening statement?

Actually, first, when we were running the plant before this quarter, it was suboptimal production capacity we were running. So in last quarter, we were able to operate the plant at 101%. Once you operate the plant at full capacity or more than the full capacity, a lot of positive things happen. And one of the positive things is that specific energy consumption in terms of per MMBtu consumption [ for 1 ] metric ton has gone down significantly. Second, the fixed cost allocation is to a higher quantity. Third, we -- through our portfolio -- because in our portfolio we have options to have, make available the gases which suits the Pata petrochemical production and the viability, we are able to do that. So all these factors have enabled the profitability in Q3 for Pata petrochemicals.

[ That's great ]. And lastly, if I may, if you can also talk about the opportunities on increasing your volumes for marketing business. Are you sourcing new gas? What kind of gas contracts and gas pricing are you experiencing there? What is the new volume tie-up that you expect to do [ over next season ]?

So our Chairman has already [ said on ] various occasions that we intend source 7 to 8 MMTPA of additional gas for our portfolio and maybe 1 to 2 MMTPA on a yearly basis. In this regard, already there was an announcement that we have signed a contract for 1 MMTPA which is going to be available to us from '26, calendar year '26. We are also in advanced stage of discussions with various suppliers, and very soon, we may be able to inform you when we conclude these deals. So we are on the job to source the gas, so as to have broader portfolio and do more marketing, [ okay ]?

Excellent, sir.

[Operator Instructions] Our next question is from the line of Sabri Hazarika from Emkay Global.

Congratulations on good set of numbers. So I have 2 questions. The first one is relating to marketing. So from what we understand generally, the marketing margin in APM gas is something like INR 200 per MSCM, which is like around $0.1 per MMBtu. And in LNG, it generally ranges somewhere around like $0.20 per MMBtu, so if we do a rough calculation, we generally end up at, say, around INR 2,000 crores, INR 2,500 crores kind of marketing EBITDA for the year, so I'm just wondering that -- when you were like citing INR 4,000 crores. So does it mean -- I mean these arbitrage opportunities. They are like more recurring on -- in nature. Or do you think -- has there been any like structural increase in gas marketing margin? Or anything of that sort has happened.

Actually, you are arriving at these numbers based on the sales price which includes the certain fixed -- or some fixed kind of marketing margin. That is one part of it, but our portfolio does not include the APM gas and RLNG which we market at fixed margins. Our portfolio also includes -- significant portfolio also includes wherein we have an option and opportunity where we are able to market the gas on a mid-term to long-term basis on higher marketing margins than what you have estimated. That's one thing, but apart from the marketing side, it is also sourcing side. I also narrated during my brief that we are able to do a lot of things which is -- through which we are able to reduce our cost of gas sold, like time swaps, destination swaps, ship-to-ship transfers, a lot of things which we do. And all these things [indiscernible] and then taking this position in financial markets, the [ paper ] positions, because we have a lot of portfolio or -- available to us. So all these things enables us to have at least a number of INR 4,000 crore which we have seen in last 2, 3 years. Because every year, when we are giving guidance, we are working out these numbers, right? Before this year, we said INR 3,000 crore. We surpassed given the worst kind of situation. This year, we said INR 3,500 crore. We again went back to our calculation [ suite and talked ]. Again [ we achieve it ] and then we have done it. So similarly, for next years, we see that the gas marketing volumes are growing. Growth is there in the business. And also we are able to take the benefit of a lot of options which we are exercising because we have a lot of flexible gas, at least from United States.

Right. And marketing volumes will also grow by around 5%, 6%. Or it will be even more than that.

We expect marketing volume to grow at least by 5% to 6%.

Okay, sir. And second question is relating to your transmission business. So the KG basin tariff order just came, sometime, back; and they have like increased the gas cost, gas pricing assumption in the quarter. I think they've taken some long-term average of HPHT. And also this is the final. Or do you think there could be further upside to the gas cost assumptions?

I understand you are talking of KG basin tariff. Is that right?

Yes, yes. That's right. I mean that's right. They've taken that assumption, but does it mean that even for unified tariff and integrated tariff also that assumption may be taken? Or...

I think, if you go back to the tariff order, there is no implication of any gas assumption in KG basin tariff because there is no compressor station. There is no [ fuel consumption ] in KG basin tariff, so that has no link with the tariff of HVJ which is part of the unified tariff, where compressor fuel is being used. That is a separate issue.

I'm talking about the gas price.

Gas price, well, gas price, how will it impact in tariff -- unless it is used as a compressor fuel or [ transmission loss ]. Only these 2 things happen.

Okay, got it, sir. So it is under review only and will come separately...

Right, right.

Our next question is from the line of Maulik Patel from Equirus.

Sir, a few questions. Sir, now you do not have any of this APM gas for your gas compression business -- sorry, in the gas transmission business, so is this an normalized cost on transmission segment?

If I understood you, you are telling there is no gas allocation and at what cost we are booking. Is that right?

Yes.

So since there is no gas allocation, we are sourcing the gas for our compressor fuels. We are trying to source the gas from domestic sources and to the extent it is available. Or else, we use the RLNG for our compressor fuels, which is at prevalent market price.

You are using around 1.7 MMSCMD of gas for the compressor business, right, approximately?

Right, right, right.

Now from this quarter onwards, it will be on market prices, whether it's in HPHT. Or it will be export LNG.

Right, export LNG or the gas available out of our portfolio.

Okay, okay, okay. And sir, when do you expect that order to come now? I mean because earlier the assumption was that, within a year, regulator will revisit the assumptions what they made into this integrated tariff pipeline at $3.5. When do you expect that, to [ have it again ]?

Actually, we are following with PNGRB. And we expect them to take a decision soon, but we understand that there is issue of member legal there.

Okay, yes.

Probably that is delaying that process.

Got it. Sir, last questions. This is on the petchem side. Now [ you have turned ] into that, again, profitability. And this quarter, spot LNG prices are again lower than the previous quarter. Is it fair to assume that your profitability will substantially improve in this quarter? And sir, any update on that -- acquisitions, what we have done a couple of quarters back, that INR 2,000 crore which we are supposed to spend? When do you plan to start operation in that?

Yes. So it is fair to assume that profitability for petrochemical project or plant Pata will certainly improve, as compared to Q3, and -- definitely. And we expect it to be the level of PBT -- or rather, we will be at break-even level for Pata petrochemicals on yearly basis. Second question is with respect to the plant which we have recently acquired. That is erstwhile JBF Petrochemicals. We expect that plant to be commissioned by March '25.

Okay. And sir, will -- the spend is around, what, INR 2,000 crore in that, right?

We have acquired that through NCLT process at approximately INR 2,100 crore. And then we are expected to incur around INR 2,000 crore to bring it to the -- a commissioning level.

Sir -- and PDH plant will also commission around that time [ only ], next year.

Yes, yes. PDH will be commissioned mechanically by April '25.

April '25, so commercial will be -- take another 6 more months to complete it.

Maybe 3 months.

Our next question is from the line of Vikash Jain from CLSA.

So a couple of questions. Firstly, on your volumes. Now this 121 volume that we are seeing, could you just remind us? How much of this is outside the main pipeline, which is the unified pipeline? How much of this is outside that, like the Kochi-Mangalore...

Maybe 10% of the volume is out of the unified networks. KKMBPL and KG basin is a large volume. Rest are very, very minimal. So KG basin may be around [ 4 to 5 ]. Again this is -- or [ 4 to 5 ] -- KG basin -- so 8 -- 9 million to 10 million volume, 8 million, 9 million. And then another, Agartala region, which are small network which are not part of this unified tariff.

Okay. No, because what I'm asking is that if the kind of growth that we are talking about, if we are at about 110 or so -- we get another 8, 9 MMSCMD of growth. Then we would be already at 75% utilization, right, for the main networks. In that case, incremental volume increase could also lead to tariff adjustments. Or how does that work?

Vikash, you know the tariff regulation. [ Actually ], we don't [indiscernible] that incremental volume will lead to reduction in our revenues before regulations are such that, any under-recovery of past years, we have right to recover from any over-transmission in coming years. So there will be years when we have under-recovery. In past, we have years. So those under-recovery will be first offsetting from oversupplies if -- whenever it happens, so there is no question, even if we reach 75% level, that we need to pass on.

Okay. Okay, yes. That's a useful clarification. And the other thing was this OpEx that we see, sir, for this, for gas transmission segment. That's gone up significantly, so there are -- this is because, all of this quarter, the complete allocation is gone. Or there was part of it that was around...

Yes, yes. This quarter, Vikash, the allocation is totally gone now in 2 stages, 1, I think, in August...

1st...

1st October. And second is December 16. So with effect from December 16, we don't have any allocation of APM gas for use in compressor fuels.

So that is December 16, so next quarter, if anything, OpEx will be even higher. Because -- why I'm asking that, sir, is we are right now -- I mean, last year, there was this thing about the OpEx being one-off because there was higher -- much higher-priced spot LNG, $40 spot LNG, that you had to use and all of that, but even now that I see, most likely, next quarter, OpEx from gas transmission will be at a much higher level. Because you said that December 16 is when it went. Full effect will be in January to March. Is that...

Not much [indiscernible].

Margin [indiscernible].

Because higher...

[indiscernible] because the quantity reduces only 0.2, yes. [ It's a little bit ] higher level, not at a much [ higher level ].

So 0.2 of a base of 1.7, right?

Right.

So 1.5 -- say 1.7 [indiscernible], so that is what -- so about 10%, 15% kind of an adjustment.

Again, a higher [indiscernible].

Okay. And any reason why LPG realizations look a little low? Any reason [indiscernible] you can think of that you can -- because this appears to be a little bit of a discount to what I thought was the market price.

Can you come back again, Vikash?

LPG segment realization. Any reason why they appear to be a bit low? Or you don't have any specific reason you can think of...

No, we don't have because it's all market-driven import parity price. And we don't have any control over it. So there's no specific reason [ international ] prices are in that range.

Okay. And finally, where do you see -- so when you say this 12 MMSCMD growth, that in your opinion is more you are talking. Because I think you said, over the next 3 years, average of 10 MMSCMD, 12 MMSCMD growth is what you see. So that's more like we should be thinking of more from a perspective of CAGR rather than, specifically next year, 10 MMSCMD, 12 MMSCMD coming. Is that how you think about it?

Yes. Let me tell you. Currently there is a disruption in supplies from one of pipeline, Dadri-to-Panipat IOCL supply, right? So we expect that 3 MMSCMD volume at least to come back. Increase in offtake: Every year, there is a growth in CGD by 12%, 13% even if you take roughly 70% of our market shares. 3 MMSCMD will come from there. IOCL Barauni, we expect to come 0.5; and the general increase. So we have the bigger data from where this 10 to 12 will be available. I have given only two, three to you [indiscernible] able to share you.

Why I say that, sir, because 10% increase you -- when you are increasing 10%, Indian gas demand is also rising, effectively close to that. That is something that we have not seen for many, many years. And there have been...

Right. You are right. We have not seen. Rather, for many, many years [indiscernible] in our country remained at -- stagnated, but this year, if you have seen, there is a good amount of growth. In fact...

[ Low base, sir ] -- which is of a low base. A lot of those price...

I agree with you. I agree with you, but...

[indiscernible] after the very high prices of last year due to the spot LNG prices being...

Right, right, right, but we expect the 10 million is possible.

Our next question is from the line of Vivekanand Subbaraman from AMBIT Private Limited.

I have 2 questions. The first one is on the petchem business. Sir, are you able to share the price of gas, the input gas, that you sourced in 3Q? And what is the assumption that you've made for FY '25, as far as the guidance on full year profitability is concerned? Second thing, could you help us understand the status of the volumes that were under dispute, the shortfall that you had from the Gazprom trading entity? And is there any compensation you received there? And resolution plans there.

We expect that, firstly, it is not the input gas which -- based on which we can assume that Pata will be profitable on a yearly basis. It's the function of both the sales price and also the input gas cost. So if you were to ask me based on current level of pricing petrochemical-wise, $8 to $9 is a very good price, input cost -- gas cost for Pata petrochemical. And we are able to source and supply at that level to Pata petrochemicals. Second assumption is that the pricing levels for petrochemical were lower even in this quarter, as compared to Q2. Even if you maintain the price level of Q2 which were higher by INR 8,000 per metric ton, we'll be at a good, profitable level for -- and -- in Q4 and also the next financial year.