GAIL improves in Q2 as lockdowns ease, demand for gas grows in cities

Rebound in performance, improved gas transmission prospects and inexpensive valuations are keeping analysts positive.

The gradual improvement in GAIL’s performance following the easing of lockdowns — evident from its September quarter (Q2) results — has spurred Street sentiment. The GAIL stock has gained over 4 per cent in two sessions after the results announcement.

The company, operating India’s largest pipeline network for gas transmission, is seen as a major beneficiary of an uptick in domestic gas demand. Growing city gas distribution, and rising demand for cleaner and cost-effective fuel from automobiles and industrial sectors, will improve it’s transmission and trading volumes.

In Q1, the lockdown had impacted volumes and gas trading revenues, while lower gas prices raised concerns over the placement of its high-priced imported gas contracts. Similarly, lower petrochemical prices, too, played spoilsport.

GAIL, however, saw a gradual rebound in Q2, with higher gas transmission volumes and a better performance in the petchem segment. Gas transmission volumes jumped 18 per cent sequentially to 106 mmscmd (million standard cubic feet per day), crossing the FY20 average. 

The segment’s operating profit surged 42.4 per cent sequentially, and 27 per cent year-on-year (YoY). Completion of the Kochi-Mangaluru gas pipeline in November should aid volume growth in the near term, while expansion in East India (completion by FY22-23) will improve long-term prospects.

Gas trading, however, remains under pressure. Volumes were 6 per cent lower YoY, with operating loss coming in at Rs 364 crore. Nevertheless, the loss narrowed from Rs 545 crore in Q1, thanks to rising global spot prices. 

With demand improving, GAIL received 20 LNG cargoes in Q2 (including six that it sold outside India). Despite concerns over placement of high-priced imported gas contracts, the re-starting of domestic fertiliser plants should help. 

Analysts expect the commissioning of Gorakhpur, Sindri and Barauni (pre-commissioning by end-CY21) plants, along with demand from refineries (connected to Urjan-Ganga pipeline) to increase gas sales by 11 mmscmd, thereby improving placement of imported gas.

The petchem segment, too, registered a 22 per cent sequential and 3 per cent YoY rise in sales volume. While realisations were flat sequentially, lower gas prices aided margins, which helped the segment return to profits. 

Other segments such as liquid hydrocarbons and LPG saw better utilisation and profitability. Therefore, adjusted net profit increased 4.3 per cent to Rs 1,240 crore despite consolidated revenue falling 24 per cent YoY.

Analysts maintain their positive stance on GAIL, consdiering growth prospects and cheap valuations. With seven new pipelines to start by FY23, transmission volumes are seen rising 35-40 mmscmd (35 per cent). 

Trading at a 50 per cent discount to its long-term 1-year forward P/E of 13.2x, it is an excellent opportunity, says Motilal Oswal Securities.