GAIL: Steady outlook

14 Feb 2024 , 12:46 PM

Analysts of IIFL Capital Services met with the management of GAIL at IIFL’s 15th Enterprising Bharat – Global Investors’ Conference in Mumbai. Key takeaways were: 1) Steady volume growth of 6-7% pa in the transmission business to continue, 2) Gas marketing business on a strong footing; aiming to earn at least Rs45bn pa of Ebitda in FY25/FY26ii, 3) Petchem segment to return to profitability in FY25 on the back of favourable contracted LNG terms & gradual recovery in spreads. With a steady outlook on each of GAIL’s businesses, analysts of IIFL Capital Services maintain their FY24-FY26 estimates and see valuations as reasonable. 

Growth drivers intact: 

GAIL expects gas consumption in India to achieve a 7-8% Cagr until FY30 (reaching 300mmscmd by 2030) and views it as a crucial enabler of country’s energy transition. GAIL anticipates its core NG transmission volumes to also witness a ~7% pa growth through FY27ii, driven by the completion of key trunk pipelines and steady consumption from refineries, CGDs, and fertilizers. Furthermore, the profitability of the transmission business could see an improvement of Rs10bn pa, provided PNGRB accepts its contentions on cost escalations it due to internal gas consumption. Its gas marketing business is also robust, aiming to earn Rs55bn of margins in FY24 and a minimum of Rs45bn pa thereafter driven by steady margins and 5-6% pa growth in the volumes. 

Petchem profitability to improve: 

GAIL expects to break even in the petchem business in FY24 on a full-year basis and return to profitability from FY25 onwards, driven by favorable LNG contracts and gradual recovery in the petchem spreads. However, in its LPG business, although it is earning strong margins driven by firm LPG prices, it is facing production constraints due to the shortage of availability of rich gas. 

Key projects on track: 

Through FY25-27, GAIL has plans to invest Rs75- 80bn pa to step up pipeline capacity, petrochemical expansions, CGDs, and RE including green hydrogen. It is on the lookout for sourcing additional LNG (5-6m MT) over the next few years, as its existing 14m MT portfolio is nearly contracted on a back-to-back basis. Also, all its petchem projects are on track, including PDH PP in Usar (Rs113bn, CY25), PP plant at Pata (Rs13bn, CY24), IPA plant at Usar (Rs5bn, CY25), and Mangalore petchem (Rs42bn, CY25), which will help diversify the revenue mix. Also, a 4.3TPD hydrogen plant (Rs2.3bn) is set for commissioning in CY24 itself.