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GAIL India poised for sustained outperformance with multiple growth drivers
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).
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.
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