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GAIL India poised for sustained outperformance with multiple growth drivers: Report, ET EnergyWorld

New Delhi: GAIL (India) Ltd, the country’s largest gas distributor, appears set for a period of sustained outperformance over the next 2-3 years, driven by multiple favorable factors, according to a report by ICICI Securities. The company’s strong performance is expected to be underpinned by growing domestic gas supplies, LNG liquefaction capacity, moderate pricing, normalisation of LPG prices, and an improving petrochemical segment.

The report highlights the prospect of rising earnings in each of GAIL’s key segments over the next few years. Notably, the increasing gas supply and favorable price differentials between US Henry Hub prices and spot LNG are identified as key drivers of potential upside.

ICICI Securities has reiterated a “BUY” rating for GAIL India with a revised Sum of the Parts (SOTP) based target price of ₹154 (from ₹149).

Strengthening gas supply environment

Domestic gas supplies in India have been on the rise in recent months, with domestic gas output reaching approximately 99 million metric standard cubic meters per day (mmscmd). Reliance Industries Limited (RIL) has played a significant role in this increase, with a substantial rise in its gas output and further expected growth. The imminent commencement of ONGC’s KG basin asset and the potential for more affordable LNG supplies in the coming years are anticipated to boost domestic gas consumption by approximately 20 mmscmd by FY25E, thereby positively impacting GAIL’s transmission segment earnings and trading segment volumes.

LPG and petrochemical segments on the rise

The report indicates that the upward trend in LPG (propane) prices witnessed over the last two months is expected to continue in the medium term. This development is significant for GAIL, as every USD 50 per metric ton rise in LPG prices is projected to improve segment EBITDA by ₹4.1 billion. Additionally, an increase of USD 100 per metric ton in HDPE prices is expected to enhance petrochemical EBITDA by ₹5.5 billion. The gas costs for the LPG segment are forecasted to remain flat over FY24-25E, increasing only by USD 0.5 per Million Metric British Thermal Units (MMBtu) thereafter. The petrochemical segment is also expected to benefit from improving realizations, moderated spot LNG prices, and enhanced utilization, leading to a sharp rise in EBITDA from these two segments by FY25E.

Robust growth prospects and financial summary

GAIL’s revised estimates suggest an EBITDA compound annual growth rate (CAGR) of 30% over FY23-25E, with potential upside from stronger tariffs, higher LPG prices, and better trading segment results during the same period. Consolidated PAT is also likely to grow at a CAGR of 38% over FY23-25E.

The company’s aggressive capital expenditure plans in both gas transmission infrastructure and petrochemical capacity are expected to bear fruit, with multiple projects in progress. GAIL aims to add approximately 6,935 kilometers of gas transmission pipelines and 560 thousand tons per annum (ktpa) of petrochemical capacity over the next 2-3 years, with significant investments already made. The company’s diversified portfolio, including renewable energy capacity and involvement in city gas distribution (CGD) geographic areas, is poised for substantial growth in the coming years.

Attractive valuations and upside potential

Despite its positive outlook, GAIL India remains attractively valued, with a Price/Earnings (P/E) ratio of 7.7x FY25E EPS and an Enterprise Value/EBITDA (EV/EBITDA) ratio of 7.1x FY25E. The report anticipates earnings upgrades and multiple re-ratings over the next 12 months, highlighting the favorable price differentials between Henry Hub and spot LNG as key triggers for the company’s growth.

Key downside risks

The report also identifies key downside risks for GAIL India, including sharply lower gas consumption trends, a significant impact of higher gas prices on the petrochemical and LPG segments, and a reduction in pricing gaps between US LNG and Asian spot LNG prices.

  • Published On Sep 11, 2023 at 02:07 PM IST

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