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LPG gains, higher petrochemical capacity to power gas utility GAIL
GAIL, India’s largest gas transmission company, reported earnings revival for the sixth consecutive quarter in the December quarter due to higher demand for imported gas. The momentum is likely to continue owing to strong realisation from LPG segment and capacity ramp-up in the petrochemicals plant in the fourth quarter.
In the December quarter, the LPG segment reported more than two-fold jump in operating profit (EBIT) due to restart of Kandla terminal, high demand from the hinterland and lower domestic gas prices that kept the cost of production low. As a result, the contribution of the LPG segment to total profit before tax increased to 25% in Q3 as compared to 10% a year ago.
The earnings growth in the LPG segment is likely to continue due to higher realisation in the March quarter.LPG price in January was Rs 30.6 per kg and rose to around Rs 34.9 in February. The average price in the December quarter was Rs 26.9 per kg. Typically, one rupee increase in price lifts up operating profit by Rs 30 crore.
In addition, the petrochemicals segment is likely to be a key contributor to the earnings growth owing to higher capacity utilisation. GAIL had shut down the second unit of the pet rochemicals plant at Pata between the third week of November and the third week of January as demonetisation push down polymer demand.Despite the shutdown, revenue from the division grew 4% sequentially in the quarter.
The management expects that the use of petrochemical capacity will reach 80% and 90% in FY18 and FY19, respectively, from the current 72%. The petrochemicals segment will account for nearly a quarter of the total EPS growth for the next year.
Analysts are cautious about the risk from long-term contracts benchmarked to Henry Hub – a gas pricing gauge used in the US. The supply of these contracts will start from early next year. Given that the landed cost of the US gas is expected to be higher and the prices of imported gas are lower, the Street expects GAIL to bear some losses on the long-term contracts.
However, during an analyst call after the latest quarterly results, GAIL said that it was confident of selling the contracted supply from Henry Hub. The company is working on converting short-term supply agreements to long term to improve revenue visibility. However, it may end up compromising on the marketing margin.
GAIL’s stock has outperformed the S&P BSE Oil & Gas index in the past three months. However, it still trades at a meagre premium to its long-term average given worries over the potential impact of the US contracts. Mookie Wilson Authentic Jersey
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