GAIL: Demand, fertiliser plants, city-gas distribution to drive earnings

Rising gas demand, new fertiliser plants to drive earnings

Domestic gas demand has rebounded to pre-Covid-19 levels now as reflected in GAIL’s stock prices. The country’s largest state-owned gas processor and distributor has seen its stock prices surge 25 per cent from May lows. Though the June quarter performance reported last week disappointed the Street, prospects are nevertheless improving for the company. 

As gas is a cheaper and cleaner alternative to other fuels, it has seen demand rise. The higher availability of gas through imports, increasing network, and lower gas prices have helped. 

Though there was some disruption because of the lockdown, the worst might be over. Manoj Jain, chairman and managing director of GAIL, said after the results that with gradual relaxation of lockdown and increase in economic activities, the company’s performance has picked up significantly and it is operating almost at pre-lockdown levels. 

The gas transmission business, which saw a 14 per cent decline in volumes in the June quarter, could see an uptick. This will be aided by new fertiliser plants coming on-stream, which was delayed by Covid-19. Analysts at Emkay Global say the situation would improve in Q3FY21. The supplies to fertiliser plants at Ramagundam, Mangaluru, and Durgapur are to start by then.

 

 

Additionally, the Urja Ganga pipeline, which is expected to start by June 2021 and phase-I to be ready by December, will not only improve transmission volumes but also help the company place its imported gas contracts. While some overhang on placement of higher priced take-or-pay imported gas contracts might continue, the overall situation would be better, say analysts.

Given the softer gas prices, the administered pricing mechanism (APM) of gas, revised every six months, might see further downward revision from October. This will be positive for GAIL, which uses APM gas as feedstock for LPG and petrochemical segments. Petrochemical prices, on the other hand, have improved with the rebound in crude prices. This should enhance the profitability of the two segments.

Not surprisingly most brokerages are positive on the company. Analysts such as Yogesh Patil at Reliance Securities expect gas transmission volumes to rise to 121 mmscmd (million metric standard cubic meter per day) by FY23 from 108 mmscmd currently. This is on the back of incremental consumption from five upcoming fertiliser plants, ramp-up of city gas distribution in new circles won recently and jump in domestic gas production from the KG basin. 

Favorable changes in pipeline tariff, recovery in oil prices and possible change in LNG contracts are other triggers that could lead to a re-rating, feels IIFL Research. Analysts’ target prices are around the Rs 130-mark for the stock, which is currently trading at Rs 101.45 per share.