Gail India shares rise 3%: Should you buy this stock? LNG prices to play major role ahead

The share price of Gail India soared by nearly 3% to touch intraday high of Rs 358.90 per piece on Senxex during Wednesday’s trading session. At around 1139 hours, the stock was performing at Rs 357.40 per piece up by Rs 8.10 or 2.32%. Investors and experts have become very optimistic in Gail India shares, especially after the company posted highest every annual net profit. Gail revealed that in their journey of over three decades, the company has recorded its highest ever Profit after Tax of Rs 6,026 crore for the Financial Year 2018-19, which is a jump of 30% from previous fiscal year. This was on the back of better physical performance in all segments and better realisations. Meanwhile, turnover was up by 39% at Rs. 74,808 crore. Also, gross Margin up by 25 % to Rs. 10,774 crore, EPS up by 30%. On quarterly basis, GAIL registered PAT of Rs. 1,122 crore in Q4 FY 18-19 up by 10% vis-a-vis the corresponding period in the last fiscal. 

B.C.Tripathi, CMD of GAIL said that, all segments contributed positively to company’s profit during the year. Gas Marketing, Gas Transmission, LHC and Petrochemicals Segments performed better than the last year due to improved physical performance coupled with better realisations in these segments. GAIL’S PAT has registered consistent growth of over 30% year on year in each of the last three financial years.

Tripathi further added, “GAIL is fully committed to build the Natural Gas Infrastructure in the country hitherto untouched by Green Fuel till last mile connectivity. Pipeline like other _ Infrastructure has a long gestation period and GAIL would be borrowing substantially by leveraging its strong Balance Sheet to complete the Natural Gas Infrastructure in the larger National Interest.”

You can still continue to buy Gail India sharers as the company is seen as multibagger. Interestingly, LNG price will play a major role for Gail ahead. Here’s what analysts said!

Spark Capital:

Vishnu Kumar and Somaiah Valliyppan analysts here for 1-year outlook ahead said, “Expect EBITDA/PAT CAGR of 4% each over FY19-21E from a very high base (FY19 EBITDA/PAT grew 25%/36% yoy) as Tariff upsides are largely offset by lower earnings from Trading biz (one time incremental gains in FY19 in our view), however improvements are in higher multiple biz (8x EBITDA) offset by drop in low multiple biz (4x multiple – FY19 gains also not factored in the price).” Hence a  FY21E SOTP based estimates yield a TP of Rs. 440/sh. Maintain BUY.

But the duo also provided a three year outlook for Gail which is even more promising. They said, “We remain positive on the long term prospects of GAIL driven by 1) increased gas availability both from domestic & new LNG terminals – additional 40+mmscmd over the next 3-4 years aiding current low utilisation in Gas transmission biz & improving volumes/margins in trading. Post JHBDPL completion see 10-15mmscmd incremental volumes from fertilizer/refinery demand , 2) increased transmission tariffs over the short/medium term, 3) rebalancing of LNG markets in the next 2-3 years aiding for a strong earnings in GAIL’s US LNG portfolio and 4) rising oil prices to aid margins in Petchem & LPG biz amidst modest domestic gas prices & benign LNG prices.” Hence, their r FY 23E SOTP based TP yields a TP of Rs. 485 (~50% returns incl. dividends) .

HDFC Securities: 

Nilesh Ghuge and Divya Singhal analysts at HDFC Securities said, “Given GAIL’s dominant position in India’s gas pipeline network and the high share of volume in the upcoming eastern corridor gas pipeline, its gas transmission business is likely to be in a sweet spot. Maintain BUY.”

They added, “(1) Rising supply of NG and (2) A multitude of LNG liquefaction terminals coming on-stream towards the fag end of CY19 will boost RLNG exports from US and also keep Henry Hub (HH) prices subdued in the near term, enabling GAIL to swap more cargoes. Thus, the US LNG is not a stress point. Our SOTP target is Rs 408 (7.5x Mar20E EV/e to the more stable Gas and LPG transmission businesses, 5.0x EV/e to the more volatile gas marketing business, 6.5x EV/e for the cyclical petchem and LPG/LHC businesses, Rs 75 for investments and Rs 23/sh for CWIP).”

JM Financial:

Mehul Thanawala, Ashish Mendhekar and Ankit Kabra analysts here said, “GAIL and its subsidiaries have won licenses for 8 Geographical Areas in the 10th round of CGD bidding and GAIL has plans to invest INR 120 bn in the CGD segment. At the ensuing analyst meet, GAIL stated that they have recently updated the strategy to focus on three key areas (1) Creating infrastructure, (2) Unlocking demand, and (3) Growing petrochemical business (details on next page). We continue to maintain a HOLD rating with a revised TP of INR 355 (INR 335 previously).”

Reliance Securities:

Yogesh Patil, Research Analysts here said, “Though the investors are concerned with trading margins at GAIL’s Gas marketing segment in low spot LNG prices, the company has sold all contracted 2019 LNG volumes and likely to earn trading margins on LNG marketing portfolio (12.5MMTPA). GAIL is de-risking its US LNG import contracts by signing longterm gas sale agreement with the upcoming Fertiliser plants. Subdued petrochemical prices and PE cracks along with falling LPG cracks (-$24.5/bbl 1QFY20TDaverage) will continue to keep the realisation subdued. Looking ahead, we believe growth in LPG segment is capped by 10% rise in domestic gas prices. The Company will continue to swing in gas volume from HVJ to DVPL. Further, the PNGRB is likely to upwardly revise HVJ and DVPL tariff in next 1 months. Our model suggests every Rs2.5/mmbtu rise in tariff will lead to 3% upside to GAIL’s FY20E EPS. GAIL expects to ramp-up utilisation level of its petrochemical plant to 90% and 98% in FY20 and FY21, respectively.”

“We expect gas transmission segment to drive GAIL’s EBITDA, as the segmental volume rose by 1% QoQ and 2% YoY to 109mmscmd in 4QFY19. We believe, completion of Kochi Mangalore pipeline and commissioning of fertilisers plants and new CGD players would increase gas consumption in the long-term. We expect GAIL’s earning to clock 13% CAGR through FY19-21E backed by increase in pipeline tariff (HVJ & DVPL) and expected higher utilisation of Petrochem capacity in the next 2 years,” said Patil. 

In light of the above factors, Patil said, “ At CMP, the stock trades at ~6x of FY20E EBITDA, which is at discount to its long-term average of 8.4x (over the last 5 years). We expect GAIL to witness strong FCF generation of Rs73bn over FY19-FY21. As the stock provides high earnings visibility with expected healthy RoE of 13% over the next 2 years, we maintain our BUY recommendation on the stock with revised Target Price of Rs386.”