GAIL's bets pay off

Petchem and LPG segments will drive profits; reducing risk of US contracts another trigger

GAIL has corrected significantly from the highs of Rs 433 in May this year to Rs 372.45-levels now. The Street was concerned about the declining trend of crude oil prices and higher priced take-or-pay US liquefied natural gas (LNG) contracts at the start of 2017. 

On the positive side, crude oil prices have started rebounding, which should offset concerns on profitability of segments such as petrochemicals. The good performance in the June quarter (Q1), in spite of planned maintenance shutdown at its petrochemical facilities, should add to the confidence. Petchem sales volumes rose 19 per cent year-on-year (y-o-y) but were down 30 per cent sequentially. The segment has continued to benefit from ramped-up capacities and also lower natural gas prices (reworked RasGas, Qatar contracts) resulting in lower input costs, helping boost profitability. The volumes are expected to rebound in the September quarter.

Petrochemical weakness was partially offset by strong earnings in liquid petroleum gas (LPG) and liquid hydrocarbon segment (LHC). Due to higher availability of rich gas, LPG-LHC sales were up 20 per cent y-o-y and realisations at $507/tonne was up 30 per cent y-o-y according to Motilal Oswal Securities’ computations. The segment’s operating profits thereby were at Rs 532 crore, up 148 per cent y-o-y and six per cent sequentially. The petchem and LPG-LHC segments are expected to continue driving earnings moving ahead.

Transmission tariff increased five per cent y-o-y, though it was offset by slightly lower volumes. There are expectations of tariff revisions, which should bode well for the segment. For the gas trading segment, analysts say they’re conservative, but it could surprise on the positive side. The demand for natural gas, helped by lower prices, is increasing and GAIL stands to be the beneficiary.

Analysts at Motilal Oswal say the company’s operating performance in Q1 was in line with expectations, though profits fell short of expectations on the back of lower other income.

With the outlook for various segments positive, earnings were expected to improve. Also, concerns over US LNG contracts impacting earnings were reducing. GAIL is actively scouting for domestic and international consumers for US LNG contracts with supply expected to commence from November 2017 (further increase in January 2018). The company is believed to have already placed a meaningful quantum of supplies with customers and is in the process to market the remaining 5.2 million metric tonnes expected in CY18, say analysts at Antique Stock Broking. Analysts at Nomura say GAIL sounds more confident on the contracts with more volumes tied up in domestic and international markets (at a premium). Analysts at Elara Securities have a “buy rating”, as US LNG viability concerns would dissipate with the completion of the Jagdishpur-Haldia and Bokaro-Dhamra pipelines, which would connect five fertiliser plants, by 2020. Analysts at Elara, Nomura and Antique have target prices in the range of Rs 445-495.