Maintain ‘buy’ on GAIL with increased TP of Rs 173

By: |
February 23, 2021 8:56 AM

Commissioning of customer projects, completion of pipelines, and rising oil prices all bode well for gas demand and GAIL We expect gas trading and LPG production to also show improved profitability.

GAILGas demand finally set to rise: Long-awaited commissioning of HURL fertiliser plants in Gorakhpur, Barauini, Sindhri, and Matix has started and this is set to drive gas demand for GAIL.

GAIL, LPG production, CGD networks, Urja Ganga pipeline, natural gas trading

Commissioning of customer projects, completion of pipelines, and rising oil prices all bode well for gas demand and GAIL We expect gas trading and LPG production to also show improved profitability. Increase target price to Rs 173 (from Rs 156) and maintain ‘buy’ rating as stock still trades 15% below its 10-year mean core PE.

Gas demand finally set to rise: Long-awaited commissioning of HURL fertiliser plants in Gorakhpur, Barauini, Sindhri, and Matix has started and this is set to drive gas demand for GAIL. Further return to normalcy and start of public transport will further increase demand by city gas distribution (CGD) networks. In this backdrop, as sections of GAIL’s

Urja Ganga pipeline are commissioned, new sources of demand are expected to emerge. Elimination of natural gas trading losses and improvement in LPG/petchem look likely: In 9MFY21, GAIL incurred Rs 8.9 billion of losses on natural gas trading as demand in India waned and it had to sell a significant amount of LNG cargoes outside of India. As demand recovers and LNG prices remain at moderate levels, we expect profitability of the segment to return. In FY20, this segment was responsible for c23% of EBITDA. Similarly, the LPG segment benefits from increasing crude oil prices and petchem benefits from improved naphtha spreads.

Set for longer-term growth path: GAIL’s current pipelines are currently 54% utilised. As demand rises, increased utilisation should flow directly to the bottom line. In addition, a significant proportion (c20% of gross fixed assets) remains under construction. As sections of these pipelines are commissioned (c7500km under construction on an existing 12,500km pipeline), it should spur demand and improve ROE for the company.

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