BackPandemic a near-term stress for Gail but stock’s lower valuations offer comfort
Analysts are optimistic about volumes from a medium-term perspectiveCommissioning of all sections in the Kochi-Mangaluru pipeline by the end of July is expected to boost volumes
PremiumMumbai: Life Insurance Corp. of India increased its stake in Gail (India) Ltd by an additional 2%, taking the insurer's stake in the company to 7%. Gail’s investors took this news positively with the shares up about 3% on Thursday on NSE. While the stock gave up some of those gains in early deals on Friday, in general, its lower valuations and Gail’s vast presence in the gas value chain puts it in a sweet spot.
The stock has appreciated as much as 52% from its March lows in 2020. However, the shares are still about 20% away from the highs seen in January.
Of course, the company is not immune to covid-19 disruptions. While Gail’s natural gas transmission volumes stood fairly resilient in the March quarter, they are expected to bear the brunt of the lockdown for the June quarter. Further, recovery in compressed natural gas (CNG) volumes could be delayed, as pick-up in off-take has been relatively slower.
Nonetheless, analysts are optimistic about volumes from a medium-term perspective. “We believe that while FY21 could be challenging in terms of traction in transmission/trading volume due to externalities... prognosis appears better in FY22e with commissioning of new pipeline section over next FY21-22," said a report from Antique Stock Broking Ltd on 26 June.
Commissioning of all sections in the Kochi-Mangaluru pipeline by the end of July is expected to boost volumes. Additionally, demand from fertiliser plants is expected to increase, which too should support volumes.
Meanwhile, analysts expect domestic gas price to be revised further downwards by September. This helps Gail in terms of lower input costs unlike gas producers such as Oil and Natural Gas Corp. Ltd whose realisations are impacted when gas prices are reduced.
Further, the possibility of including natural gas under the goods and services tax (GST) is expected to help increase gas consumption and in turn benefit the company. Analysts from Kotak Institutional Equities wrote in a report on 6 July, “Gail will be a direct beneficiary of unified tariffs, which may improve its returns on under-utilized pipelines and enhance volumes/economics for upcoming large projects; and the inclusion of gas in GST, which will remove stranded taxes on input gas for LPG/ petchem."
Currently, shares of Gail trade at about eight times estimated earnings for financial year 2022, based on Bloomberg data. According to analysts, the stock is trading below its past average price-to-earnings multiple.
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