Rising natural gas transmission volumes, new gas transmission pipelines, and improvement in profitability of the petchem segment is expected to boost state-owned GAIL’s profitability during FY24 to FY26, according to analysts.
The company is focusing on two futuristic projects, including a 4.3 tonne per day hydrogen project in its efforts to achieve 20% hydrogen blending target in natural gas, and improving the LNG availability in unpenetrated areas through small-scale LNG projects, as per Motilal Oswal’s latest report.
“During FY24-26E, we are modelling EBITDA to report a 14% compound annual growth rate, driven by rising natural gas transmission volumes to 141 mmscmd in FY26 from 121 mmscmd in FY24, substantial improvement in the profitability of the petchem segment over H2FY25-FY26, attributable to the commencement of operations of new petchem capacity and heightened demand driven by low global inventories, and the commencement of operations for 3,892 km of gas transmission pipelines and 560 ktpa (kilo tonne per annum) of petchem capacity,” the report said.
The company has commenced hydrogen blending in natural gas at a 2% rate in its city gas distribution (CGD) network at Indore and is under the process of implementing a green hydrogen project with an investment of Rs 230 crore.
According to analysts at Nuvama Institutional Equities, GAIL’s initiatives towards becoming net zero by 2040 led by hydrogen blending, green hydrogen production and setting up CBG plant and LNG dispensing stations provide it an ‘edge’.
The small-scale LNG project is currently in its pilot phase but has the potential for scaling up, with the possibility of establishing more plants in the future, according to the Motilal Oswal report.
Over the period FY24-FY26E, analysts at Kotak Institutional Securities expect GAIL’s cumulative free cash flow at Rs 8,700 crore against the cumulative net profit of Rs 28,600 crore. During FY18-FY23, the company’s cumulative free cash flow stood at Rs 11,200 crore against a cumulative net profit of Rs 37,300 crore.
“We expect GAIL’s free cash flow to stay low relative to PAT (profit after tax) in the future too, as it will likely continue to invest in capex-intensive projects, despite possible low IRR (internal rate of return) of such projects,” the report said.
The company further expects decent growth in transmission volumes over FY24-26E due to softer spot LNG prices. However, weak CGD demand and limited new capacities in the crucial electricity and fertiliser segments will likely result in modest growth in gas transmission volumes in the future, it said.
Kotak Securities expects GAIL’s volumes in FY24 to be boosted by a ramp-up in capacity utilisation at three new urea fertiliser plants and network tariffs at current elevated levels, which are 18-19% higher than the approved tariff of Rs 58.6 per mmbtu.
