Concerns cloud GAIL's earnings

Low gas prices and weakness in petchem margins lead to lower earnings estimates

Ujjval Jauhari
Last Updated : Apr 15 2015 | 11:26 PM IST
GAIL Ltd has lost a fourth of its market cap since November last year, compared to the Sensex's seven per cent gain. Declining gas prices leading to imported LNG prices becoming uncompetitive, weak outlook for petrochemical margins, increase in administered price of gas, leading to increased feed costs and off-late concerns on marketing margins and transmission charges (according to the new LNG policy for gas-based-power plants), have added to the uncertainties on earnings.

Not surprisingly, analysts have been tweaking their target prices and ratings for the stock.

Recently, analysts at Credit Suisse cut their target price substantially to Rs 320 from Rs 485 and downgraded the stock. They believe GAIL's troubles across segments are large, and seem likely to persist for a while. They add that even after assuming a $65 a barrel oil price for FY16, and zero subsidy payments, they see GAIL’s EPS falling from Rs 27 in FY15 to Rs 24 in FY16.

The company, which has a vast pipeline distribution network, earns a large part of its income from gas transmission. It has been facing under-utilisation of pipelines due to lower gas output in the country. GAIL has contracts to purchase 5.8 million tonnes per annum of Henry Hub-linked gas, for sale in India.

The gains from LNG supplies to power producers (that could have added to transmission volumes) have also seen a setback after GAIL decided to forgo part of marketing and transmission tariff. Given the reduced benefits, analysts maintain that the policy, if implemented, will have a 'neutral' impact on GAIL's earnings.

There are some positives, though. For one, the government has reduced administered price of gas by about eight per cent to $5.18 per mBtu from April 1. Given the subdued global environment, expect the price to stay benign. This would rub-off positively for GAIL's feedstock prices. The company's petchem capacities are also increasing, which will add to volumes. But, this business accounts for less than 15 per cent of profits.

Second, an upward revision in pipeline transmission rates is anticipated, as gas transmission companies are allowed a fixed 12 per cent post-tax return on capital employed, given the recent regulatory rulings in favour of GSPL. GAIL's transmission matter is pending in the appellate body, and a favourable outcome will mean gains.

Third, for the March quarter, exemption of subsidy is likely to provide some cushion to profitability.

However, given the overall scenario, analysts expect GAIL's earnings to remain under pressure for some time. Although consensus target price as per analysts polled on Bloomberg since March stands at Rs 408 for the stock trading at Rs 394, the counter is expected to remain under pressure in the near-term.

*Subscribe to Business Standard digital and get complimentary access to The New York Times

Smart Quarterly

₹900

3 Months

₹300/Month

SAVE 25%

Smart Essential

₹2,700

1 Year

₹225/Month

SAVE 46%
*Complimentary New York Times access for the 2nd year will be given after 12 months

Super Saver

₹3,900

2 Years

₹162/Month

Subscribe

Renews automatically, cancel anytime

Here’s what’s included in our digital subscription plans

Exclusive premium stories online

  • Over 30 premium stories daily, handpicked by our editors

Complimentary Access to The New York Times

  • News, Games, Cooking, Audio, Wirecutter & The Athletic

Business Standard Epaper

  • Digital replica of our daily newspaper — with options to read, save, and share

Curated Newsletters

  • Insights on markets, finance, politics, tech, and more delivered to your inbox

Market Analysis & Investment Insights

  • In-depth market analysis & insights with access to The Smart Investor

Archives

  • Repository of articles and publications dating back to 1997

Ad-free Reading

  • Uninterrupted reading experience with no advertisements

Seamless Access Across All Devices

  • Access Business Standard across devices — mobile, tablet, or PC, via web or app

More From This Section

First Published: Apr 15 2015 | 9:36 PM IST

Next Story