Analyst Corner: Reiterate ‘buy’ on GAIL with revised FV of Rs 140

Improving near-term outlook across segments. We expect GAIL to benefit from an improvement in outlook for — the gas marketing segment led by a recovery in spot and crude-linked LNG prices, petchem segment led by robust rise in PE margins, LPG segment led by recovery in prices and reduction in input gas cost and transmission segment led by growth in gas consumption. We prefer GAIL as a crude hedge over upstream PSUs and reiterate ‘buy’ with a revised fair value of Rs 140 (Rs 120 earlier).

Gas marketing: The recent increase in crude-linked, as well as spot LNG prices, will augur well for the gas marketing segment, as the respective differential with the US LNG price has reduced considerably in the past few months. This may drive a turnaround in gas marketing profitability from EBITDA losses in the past two quarters, when the contracted LNG prices were at a premium to spot LNG price and crude-linked swaps.

Petchem: The sustained sharp improvement in prices and spreads for polyethylene chain in the past several months is expected to drive an increase in profits for petchem segment, even as it gets partly offset by increase in cost of input LNG. We note that PE prices and spreads over naphtha are back at levels seen during FY2019, when GAIL had reported moderate EBIT from petchem segment.

LPG: The recent recovery in crude oil prices, seasonal improvement in LPG spreads and reduction in domestic gas price during 2HFY21 is expected to boost LPG/LHC production segment profits in the near term. Crude prices, as well as domestic gas prices remaining steady in 1HFY22, will aid profitability.

Gas transmission: The pick-up in economic activity has led to a recovery in gas demand in October 2020, with total gas consumption growing by 5% yoy to 160.5 mcm/d as compared to a reduction of 3.5% in 1HFY21—this will result in higher gas transmission volumes for GAIL