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Business News/ Markets / Mark To Market/  Gail's earnings prospects improve further on rising oil and gas prices
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Gail's earnings prospects improve further on rising oil and gas prices

Key gas transmission and distribution segments have continued to see sharp recovery post lockdown with a strong rebound in gas demand

GAIL currently owns more than two-thirds of India’s 12,000-km pipeline network. (Bloomberg)Premium
GAIL currently owns more than two-thirds of India’s 12,000-km pipeline network. (Bloomberg)

As natural gas demand remains strong , Gail Ltd's prospects continue to improve further. The stock has not only risen almost 69% since the start of November, it is also trading near its 52-week highs seen last week. The valuations are attractive and fundamentals are improving, say analysts.

The sharp rally in oil price recently has improved earnings outlook for Gail’s downstream segments – petchem and LPG-liquid hydrocarbons, said Abhijeet Bora, research analyst at Sharekhan. Key gas transmission and distribution segments have continued to see sharp recovery post lockdown with a strong rebound in gas demand. Higher gas prices are expected to drive the company’s gas trading revenues significantly.

“Higher oil/stable spot LNG price of $6-7/mmbtu (million British thermal units) is to improve the competitiveness of GAIL’s US LNG contracts: adds Bora, who expects the same to drive strong earnings at 29% annually over FY21-FY23."

The placement of higher-priced take or pay US liquefied natural gas remained a key concern of the Street earlier as natural gas prices continued to correct. The bounce back in gas prices now are providing respite and also improving growth outlook. The placement of imported gas contracts in India will also get a boost with the starting of certain gas-based fertiliser plants.

After a revival in transmission volume to 110 mmscmd (million metric standard cubic meter per day) in Q3 from lows of close to 90 mmscmd during lockdowns, analysts expect a further gain. “We expect to further volumes to increase by 12mmscmd from five fertilizer plants, namely Matix, Ramagundam, Gorakhpur, Barauni and Sindhri" say analysts at Elara Securities India (Pvt) Ltd.. Moreover, demand from fertilizer plants will remove an overhang on the natural gas (NG) trading segment.

Notably, the start of new pipelines in east India can drive sustainable growth for gas transmission/marketing volume.

Gail’s petrochemical plant is already running at full utilisation (106% in Q3FY21). Rebound in petchem realisations thereby further bodes well for overall growth in business and earnings.

“Our sensitivity analysis shows every $10 a barrel rise in crude impacts earnings per share on the positive by 4.9 or 22.4% of FY22 estimates, wherein contribution from petchem is 11.0%, LPG & liquid hydrocarbon is 5.0% and Natural Gas trading is 6.4%" say analysts at Elara Securities India (Private) Ltd.

What’s more, the proposal to bring natural gas under the ambit of the Goods and Service Tax regime bodes well for further demand growth of gas.

Gail’s valuation of 6.5 times its FY23 enterprise value /EBITDA remains at a discount to the long-term average of 9 times the stock has traded at. Further, It offers a healthy dividend yield of about 5%.

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ABOUT THE AUTHOR
Ujjval Jauhari
Ujjval Jauhari is a deputy editor at Mint, with over a decade of experience in newspapers and digital news platforms. He is skilled in storytelling, reporting, analysing and writing about stocks, investment ideas, markets, corporates and more. He is based in New Delhi.
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Published: 16 Mar 2021, 10:30 AM IST
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