The GAIL (India) Ltd stock has underperformed the Sensex in the past one month. True, investors expect Mahanagar Gas Ltd’s initial share sale to unlock value for GAIL, which is selling 12.5% stake in the city gas distributor. However, in the overall scheme of things, it may not amount to much. For perspective—at the higher end of the price band of Rs.380-421 per share, GAIL will fetch about Rs.520 crore through the offer for sale while its market capitalization on Thursday was Rs.47,618 crore. Also, at Rs.421 per share, GAIL’s remaining 32.5% stake is valued at around Rs.1,350 crore, hardly moving the needle.
Nevertheless, investors have reason to rejoice. So far this fiscal year, the share price has increased 10% from a closing low of Rs.340 at the beginning of April. A recovery in its petrochemicals business is on the cards.
Overall, fiscal year 2016 was a challenging one. Stand-alone pre-tax and one-time earnings declined by a fourth from a year earlier to Rs.3,173 crore. The petrochemicals business has been a major source of pain what with the segment posting earnings before interest and taxes (Ebit) loss of Rs.807 crore in FY16. Performance was impacted on account of lower sales volume and weaker prices.
However, the business is expected to swing to profit this year. The re-negotiation of RasGas long-term LNG (liquefied natural gas) contract at lower prices is expected to reduce raw material costs, helping petrochemicals performance. GAIL has commissioned its petrochemical plant expansion in Pata (Uttar Pradesh) with capacity of 0.4 million tonnes per annum or MMPTA (taking total capacity to 0.81 MMPTA). Accordingly, the segment should also benefit from a gradual ramp up in volume. Further, if crude oil prices continue to rise, an improvement in petrochemicals prices can be expected.
Investors must also keep a tab on tariff hikes. Motilal Oswal Securities Ltd informs that GAIL has implemented KG basin pipeline tariff from 1 April and final tariff orders for other pipelines are awaited.
The only worry, however, is that GAIL’s share currently trades at about 14 times estimated earnings for this fiscal year, suggesting a good portion of the optimism is already in the price. Therefore, meaningful upsides could be limited in the near term.
In the last one year, the GAIL stock has shed 7% compared with a 2.9% decline in the benchmark Sensex.
The writer does not own shares in the above-mentioned companies.