GAIL's prospects on the mend after poor Oct-Dec quarter showing

Most analysts have cut their Q4 and FY24 estimates but maintain 'buy' recommendations with price targets between Rs 115-Rs 125

Disappointing October-December quarter results for the 2022-23 financial year (Q3FY23) notwithstanding, it may be the right time in the petro cycle to look at GAIL as a long-term prospect. The gas marketer-cum-transporter reported its poorest results in 11 quarters.

The standalone earnings before interest, taxes, depreciation, and amortisation (Ebitda) and profit after tax (PAT) -- at Rs 260 crore and Rs 250 crore respectively -- were well below Street estimates due to weak performances across segments.

The Ebitda was down 94 per cent year-on-year (YoY), and 85 per cent quarter-on-quarter (QoQ), while PAT was down 93 per cent YoY, and 84 per cent QoQ.

There were major inventory losses in gas marketing. Adding to the woes were volume declines due to the Ukraine War and Gazprom factor, which meant under-utilisation of Petrochemicals (Petchem) capacity. Cost pressures also badly affected the transmission and the LPG-LHC segments.

The gas transmission segment’s Ebitda fell 28 per cent QoQ, with a 4 per cent volume drop to 103.7 million metric standard cubic metre per day (mmscmd). Gas is a necessary good where small changes in supply can lead to sharp swings in prices.

The marketing segment’s Ebitda dropped by 66 per cent QoQ to Rs 3 crore, with volumes down 3 per cent to 89.9 mmscmd and tariffs down 10 per cent. The LPG Ebitda also turned negative, due to a rise in unit operating costs. Petchem utilisation dipped to around 35 per cent of capacity due to shortage of Gazprom supplies. The marketing inventory loss amounted to Rs 1,100 crore due to two unsold spot cargoes as spot LNG prices dropped to $20 per MMBtu in December 2022, from $45 per MMBtu in August 2022. The transmission segment fuel cost rose by Rs 400 crore. 

While these results are disappointing, it may however be close to the bottom of a cycle and seasonal factors should be positive. While supply issues will remain, international gas prices have stabilised and fallen as we see from the inventory losses.

The Petroleum and Natural Gas Regulatory Board’s (PNGRB’s) decision on material tariff hikes is near, and there’s likely to be a further cooling in LNG prices as winter ends in Europe and the European Union finds alternative non-Russian supply sources. GAIL may also be close to signing a term LNG deal according to management guidance.

The average pipeline tariff was up from Rs 39.8 per MMBtu in FY22 to Rs 43.5 in the first nine months of FY23, as volumes rose in the Jagdishpur-Haldea & Bokaro-Dhamra pipelines. The tariffs on these segments could have a big upside. GAIL expects at least Rs 10 per MMBtu (approx 24-25 per cent) tariff hikes across its pipeline network due to amendments in PNGRB regulations, with the key revision orders expected by April-May 2023. 

The management expects Q4FY23 volumes to improve QoQ, with FY24 pipeline volumes rising to 113-114 mmscmd. The marketing earnings guidance for FY24 is maintained at Rs 2,500 crore, while the management is looking to secure gas for Petchem aiming for full capacity utilisation. GAIL intends to entirely sell the 90 US cargoes it has booked in India. Lower APM gas prices through the recommendations of the Kirit Parikh Panel could lead to cost benefits of Rs 1,000 -1,200 crore.

The FY23 capex target is Rs 8,000 crore and more than 75 per cent has already been deployed. The full commissioning of the Usar polypropylene plant is expected by April 2025, while a new 50 ktpa i-propanol plant has also been approved. 

Most analysts have cut their estimates for Q4FY23 and for FY24. But most analysts also maintain 'buy' recommendations with price targets in the Rs 115-125 range. So, there’s a possible upside but there are also key risks such as adverse price swings, currency pressures, and geopolitical risks.