Transmission volumes, unified tariff among triggers to fire up GAIL

Other factors that should benefit GAIL include the new US liquefaction terminals, and inclusion of gas in GST

GAIL’s better-than-expected show for the December quarter (Q3), led by a rebound in the gas trading segment’s performance, boosted the Street’s sentiment, leading to an almost six per cent surge in the stock on Tuesday. Most other segments, including petrochemicals, LPG and hydrocarbons also saw some improvement.

Natural gas trading, which contributes 74 per cent to GAIL’s topline, had had subdued profitability in the previous quarter as the firm had to sell larger quantities of gas in the spot market in a weak pricing environment. However, the segment's profit almost doubled sequentially in Q3. While the profit is still lower on a year-on-year basis, higher offtake due to commissioning and expansion at fertiliser plants coupled with the applicability of the take-or-pay clause will drive the segment’s profitability further even as natural gas prices remain soft, say analysts.

The petrochemicals segment too did well with volumes growing 22 per cent year-on-year, which also helped lower its loss. Moving forward, analysts expect GAIL to capitalise on the low natural gas prices to protect margins in a scenario of falling petrochemical prices.

The gas transmission segment continues to clock steady improvement in profit and reported volume growth of 2.4 per cent year-on-year in Q3. Tariffs too were up 5.7 per cent. Going ahead, the transmission business is expected to receive a boost from increased utilisation of Petronet LNG’s recently added capacity and commissioning of Kochi-Mangalore pipeline in March 2020, while another pipeline in East India will boost volumes from FY21.

On the whole, after a good Q3, the business outlook for GAIL is improving. The company has also received upgrades from foreign brokerages. Analysts at CLSA said that rebound in the trading segment’s profit should be a big relief as the disappointment in Q2 had weighed on the stock, which now trades near its 10-year low PE/PB, implying sub-5x core PE. The analysts see higher gas transmission volumes, inclusion of gas in GST, and a change to a unified tariff regime as potential triggers in 2020.

Other factors that should benefit GAIL include the new US liquefaction terminals, which will boost regassified LNG exports and also keep Henry Hub (HH) prices subdued, enabling the company to swap higher-priced cargoes, highlight analysts at HDFC Securities. Placement of higher priced US contracts have been a concern for long.

In this backdrop, most of the negatives now seem priced in. Among monitorables are AGR-related developments (telecom dues worth Rs 1.83 trillion that the company has refuted and filed an application in the Supreme Court) and demerger of the pipeline and gas trading segments. Beyond these, the risk-reward looks in favour of GAIL.