GAIL: Prospects led by gas transmission, distribution segment remain good

Analysts believe AGR demand is untenable, while growth prospects led by gas transmission and distribution segment remain good and valuations attractive

Following the disappointing September quarter results for GAIL, which were led by one-offs, adverse news flow like the one on the adjusted gross revenue (AGR) payment with respect to its miniscule telecom business has added to the firm’s woes.
 
The GAIL stock has lost a third of its value since early June. Analysts, however, say the Department of Telecommunications (DoT) is looking at the wider impact of the Supreme Court’s order on AGR dues for non-telecom entities (including GAIL) holding telecom licences.
 
Those at Emkay Global say GAIL and Oil India have received demands totalling Rs 1.30 trillion and Rs 40,000 crore, respectively (including interest and penalty), but the same is untenable.
 
Importantly, the core business prospects look good, with strong upside potential in the stock.
 
GAILTEL, the telecom arm of GAIL, provides communication services to its pipeline business along with some third-party commercial leasing of optical fibre cable. GAILTEL’s annual revenue, which was in the Rs 18-28 crore range from FY05-09, fell steadily to Rs 2.4 crore in FY19.

Based on analysts’ rough estimates, on a cumulative revenue of Rs 300 crore, a 7-8 per cent licence fee would work out to Rs 20-30 crore, which, along with interest and penalty, would take the amount to Rs 70-80 crore.
 
In the core business, demand for gas is growing and coming from the city gas distribution, fertiliser, and refinery sectors.
 
The largest gas trading and transmission segment, which contributes over 80 per cent to GAIL’s financial performance, will continue driving growth even as the smaller LPG, liquid hydrocarbons, and petrochemicals segments see weaker prospects with realisation under pressure.
 
Gas availability, which has been good, is expected to improve further. Transmission volumes, aided by the ramp-up of Petronet LNG’s recently added capacities, are also expected to rise. GAIL’s Kochi-Mangaluru pipeline is expected to be commissioned shortly, while completion of pipelines in east India is expected by FY22.
 
Analysts at Motilal Oswal see GAIL’s gas transmission volumes rising 30 per cent by FY23, with improved gas availability.
 
Further, in the gas marketing business where GAIL sources gas for sale to customers, the Take-or-Pay charges (in case of commissioning delays) will kick in after 2019. This is despite delays in fertiliser plant commissioning and maintenance shutdowns affecting performance.
 
Analysts at Jefferies say GAIL will even raise the Take-or-Pay charges in the March quarter for lower uplift, to recoup its losses.
 
Analysts say the stock is trading at an attractive valuation of 0.8x its trailing FY19-adjusted price-to-book value.
 
The target price of Emkay, Jefferies, and HDFC Securities indicate up to 65 per cent upside for the stock, trading at Rs 120.