We find GAIL’s recent stock run perplexing. First there was euphoria: it rose from mid-August lows by a sharp 36% to an all-time high at end-October. It then corrected by a steep 20%. While near-term concerns remain on weak commodity prices and subsidies, we think the long-term outlook still looks good. During the panic, the market seemed to ignore several positive factors: the low domestic gas price hike , a positive ruling by the appellate tribunal, and large potential gains from selling Henry Hub-linked contracts. We view the correction as an opportunity to accumulate shares.
Weak petchem/LPG strengthens the case for subsidy relief; concerns over the tariff/margin cut on gas pooling appear overhyped. With sharp declines in oil/under-recoveries, the current subsidy share scheme is very unlikely to continue. The government is monitoring this closely, and GAIL’s case to be completely removed from subsidy sharing seems stronger than ever. If relief comes soon, this would offset most of the impact from LPG and even petchem.
While gas pooling discussions are serious, we remain less sanguine. It will be hard to convince state governments to cut duties. Also, we think the impact on GAIL will be low. While the government could nudge GAIL to cut marketing margins on LNG, the impact would be less than 0.5% of GAIL’s EPS, based on our estimates.
Nomura