Higher LNG prices better for GAIL outlook; other businesses appear strong

Prospects across segments stay positive

Shares of Gas Authority of India or GAIL have recovered 12 per cent in the past few weeks, after falling almost 20 per cent from December highs, as concerns over its profitability are easing. Moreover, with its other business segments doing well and valuations now favourable, analysts see more gains for the stock.

Worries over the start of take-or-pay, high-priced gas import contracts, which were affecting GAIL's profitability, had led to the stock's fall in the past few months. However, spot prices of liquefied natural gas (LNG) have been rising now, narrowing the gap between imported and domestically sourced gas. A 20 per cent rise in spot Asian LNG prices to $11 per million British thermal units in the first three weeks of June (60 per cent rise from 3-month lows) bodes well for GAIL. Spot LNG prices have cooled a bit since then. But analysts are of the opinion that a strong demand from China, which has removed fears of an oversupplied LNG market pushing up prices, suggest prices may stay close to the double-digit mark. 

This is good news for GAIL's long-term, higher-priced global contracts. Though the company has sold 90 per cent of the total 5.8 metric million tonne per annum of US LNG volumes for 2018-19 (60 per cent for 2019-20 and 45 per cent for 2020-21) through destination-swaps, the remaining unplaced contracts can now find better placement and ease concerns over its earnings.

Contracts with Russian companies, too, are expected to start soon. Assuming only $1.0 and $0.5 trading margins on still-to-be-placed US and Russian LNG contracts, respectively, GAIL's earnings per share could get a boost of 3-15 per cent, says an analyst at a foreign brokerage. 

As concerns over imported LNG margins recede, prospects of GAIL's other businesses also appear strong. Petrochemicals segment, for instance, which had seen a turnaround in profitability after completion of its Pata (Uttar Pradesh) expansion, will benefit from increasing capacity utilisation and improved polyethylene prices.

The gas trading volumes and marketing segment will continue benefitting from strong industrial demand, increasing gas distribution in cities, and auto fuel demand. The completion of its Kochi-Bengaluru-Mangalore pipeline in a few quarters will further improve gas volumes. 

Thus, analysts at Jefferies believe stock valuations are inexpensive, while Nilesh Ghughe of HDFC Securities says GAIL remains a good long-term bet.