Gail (India) Ltd is in a sweet spot. The company has tailwinds of not just higher gas availability but also the softening global gas prices, boosting its transmission and trading businesses. The strong profitability in these segments should ensure that Gail manages to report free cash flow even after large capital expenditure (capex) in the coming years.
Recently, the company organized a visit for analysts to its Vijaipur plant. The company’s main gas pipeline Hazira-Vijaipur-Jagdishpur (HVJ) with a length of 6,195 km passes through Vijaipur. During the visit, the management reiterated the improved prospects for existing businesses and briefed about new initiatives.
Its mainstay business of natural gas transmission is likely to get twin benefits of higher gas volume and increased tariff from FY24.
Motilal Oswal Financial Services estimates gas transmission volume in FY24 to grow by 13% year-on-year to 121 million standard cubic meter per day (mscmd). The tariff of the transmission pipeline has been hiked from ₹43 per metric million British thermal unit (mmbtu) in FY23 to ₹58.6 mmbtu in FY24.
Consequently, gas transmission business should make up for almost 50% of the company’s Ebitda in FY24. Ebitda is earnings before interest, tax, depreciation and amortization.
Motilal Oswal analysts expect gas transmission volume growth for Gail to continue at 8% CAGR during FY24-26. The growth estimate is higher than what is indicated by the report of International Energy Agency (IEA).
According to IEA, India’s gas demand is forecast to increase at 6% per annum mainly led by fertilizer and power sector. Fertilizer sector is the biggest consumer of natural gas with 28% share followed by transportation and power at 19% and 16%, respectively.
While the demand for gas was never a problem in India, it was the supply side constraints hampering the company’s growth. For instance, there was de-allocation of domestic gas for compressor fuel that had an adverse impact of ₹800 crore on Gail’s operating profit from gas transmission in FY23.
The supply of gas should not be a problem with the country’s imports of liquefied natural gas (LNG) growing at 14% to 22,856 mscm in the first nine months of the FY24 (9MFY24). Along with higher quantum of imported gas, the other major benefit for Gail is the softening of gas prices globally because it makes the natural gas trading business more profitable.
Against this backdrop, Gail’s trading segment Ebit (earnings before interest and tax) soared to ₹4,679 crore during the first nine months of FY24 from ₹2,591 crore in the comparable period a year ago.
The strong profitability in transmission and trading business should ensure that the company has free cash flow even after a substantial capex of ₹10,000 crore each year from FY24 to FY26. The high capex also factors in new initiatives of green hydrogen plant with a capacity of 4.3 tonnes per day and 20 MW of solar power plant.
The green hydrogen plant is scheduled to be commissioned in May with its output to be used for 20% blending with the natural gas. Though the new initiatives are a step in the right direction, they are unlikely to make a big contribution to the company’s overall earnings in the near-term.
As such, investors are sitting on good gains with the stock having appreciated by 66% in the past one year. Excluding the value of investments in listed and unlisted companies such as Indraprastha Gas, Mahanagar Gas, Petronet LNG etc. at about ₹30 per share, the stock trades at adjusted price-to-earnings (P/E) multiple of 10x of its core estimated earnings per share for FY26 as per the Motilal Oswal report.
Considering the largely utility nature of the business, the valuation does not look expensive.