Higher transmission volumes, petchem gains seen ahead for Gail stock

The Gail (India) share price has seen a correction of 22 per cent in the last six months. The third quarter (Q3FY25) results were also disappointing, and analysts have cut earnings expectations for FY25. However, prospects could improve over the next 12-15 months since there is the likelihood of volume growth for transmission/trading. Capex is also easing off, which will lead to much-improved cash flows. Gas costs for petchem may remain flat, aiding realisations in the petchem segment where capacity will more than double.

 

There should be around 7 per cent annual growth in transmission/marketing volumes over FY24- 27 as the International Energy Agency (IEA) estimates India’s natural gas consumption will rise 60 per cent by 2030 from 65 billion cubic metres or bcm in 2023. IEA also estimates Liquefied Natural Gas or LNG consumption to grow at 11 per cent per annum, driven by city gas distribution (CGD), power, and industrial sectors.

 

Gail is a key player in this growth trajectory.

 

In FY26, Gail will see the start of operations in 3,115 kilometres of new pipelines and potential tariff hikes in Q1FY26 with positive net profit impact. The petrochemical capacity will rise from 810 kilotons per annum currently to 2.7 million metric tonnes per annum by FY27 as projects commence operations. The petchem product mix is also set to diversify, as will feedstock sources. This de-risks the petchem segment. The dividend yield is likely to be at 4 per cent or better, post-corrections. 

 

Even with conservative assumptions for lower petchem margins and any potential delays in commissioning of petchem facilities, and moderate transmission volume assumptions, the stock could be attractive as valuations are now quite low. 

 

Management guidance is transmission volumes of 129 million metric standard cubic meters per day or mmscmd in FY25, rising to 140 mmscmd in FY26 and 150 mmscmd in FY27. The transmission business has generated an average return on capital employed or RoCE of 10 per cent in FY24 and prior fiscals, and as volumes rise, it is expected to generate 12 per cent RoCE in FY25.

 

CGD is a key sector for offtake with the expansion of CNG infrastructure and the cost advantage of gas over liquid fuels for micro, small, and medium enterprises. Demand from heavy industrial and manufacturing sectors, including iron and steel production, will contribute 15 bcm per year by 2030, and gas consumption in oil refining is projected to rise by over 4 bcm per year as more refineries increase their capacity and also connect to the gas grid.

 

After 2028, the gap between currently secured LNG contracts and projected demand may widen a lot, leaving India vulnerable to fluctuations in spot LNG markets unless additional contracts are negotiated by then. There could also be a tight spot LNG market in H1CY25. But in H2CY25, new global LNG capacity will become operational to meet LNG demand, and spot prices will moderate.

 

There’s a high probability of gas price-related tariff hikes. The regulator considered a gas price of $12.46/mmbtu for Gujarat State Petronet recently. Gail could benefit from a projected 10-12 per cent tariff increase.

 

Gail has a cumulative capex of ₹15,300 crore for transmission projects and ₹17,300 crore for petchem projects scheduled for completion in FY26. As earnings contribution from these begins, return on equity or RoE could climb by 400-500 basis points from 9.5 per cent in FY23. Free cash flow will also rise substantially as the capex is completed.

 

Petchem capacity expansions and diversification of product portfolio and feedstock sources will reduce risk and should establish a pattern of stable profits in the petchem segment. In the Q3FY25 conference call, management guided that current average petchem realisations are likely at the bottom of the cycle. Stock price corrections across the energy sector have also affected Gail’s substantial investments in other companies in oil & gas, and if the valuation cycle is near bottoming out, there could be an upside in its portfolio and joint ventures.