GAIL: Upbeat on recovery

27 Mar 2023 , 09:58 AM

Recommendation: Buy

Target Price: Rs 120

GAIL’s MD Mr. Sandeep Kumar Gupta expects: 1) Tariff unification to lower risk in the Pipeline business and improve its EBITDA / ROCE by ~45%/200bps respectively. 2) Normalization of prices should lead to pick up in gas demand in India (~6% p.a. growth). 3) To sign new LNG contracts at attractive prices to sell in India. 4) Petrochem, Pipeline, CGD projects are progressing well.

Bullish outlook on all segments

GAIL MD expects: 1) Volatility in gas prices to subside, thereby aiding volume growth for its core transmission business; should exit FY24 at 120mmscmd (107 mmscmd now); growth thereafter should be 5-6% p.a. 2) 37% higher Pipeline tariff along with growth in volumes should boost gas transmission Ebitda/ROCE by 45% to Rs68-71 billion/10% respectively. 3) To bring (6m MT) US LNG volumes to India for LT sales. 4) Operations at polymer unit (0.8m MT) to stabilize. Efforts are underway to lower the volatility in feedstock costs (ethane sourcing etc.). 5) Implementation of KP Committee report should benefit the LPG segment materially (had to blend expensive LNG).

New projects progressing well

GAIL appraised that: 1) All its key projects, including PDH-PP, key pipelines and expansion of polymer unit at Pata are progressing well. These are expected to complete in phases through FY25/26. 2) In order to operationalize PTA unit acquired from JBF, the company will necessitate Rs20 billion incremental investments and mark its foray in polyester intermediaries. 3) Completion of Petrochemical projects should de-risk GAIL’s revenue. As such, unified tariff has diluted the risk associated with new pipelines. 4) CGD projects undertaken through various entities like GAIL Gas, IGL are also ramping up well.

Payout should hold up

GAIL’s management is cognizant of the overall returns to the minority shareholders; management would sustain the pay-out ratio and opportunistically, eye the buy-back as well. Investments in new technologies like green H2 etc., are in early stages but hold promise. Analysts at IIFL Capital Services upgrade GAIL’s FY24-25 estimated EPS by 22-23% to reflect revised pipeline tariffs, and these remain sensitive to LNG trading/commodity margins.