Improving outlook for gas trading, transmission augur well for GAIL
GAIL (India) Ltd, the country’s largest gas pipeline operator, has benefited from the lifting of the second covid wave restrictions. Demand for natural gas has increased, which means the pipeline operator is in demand for its services. Natural gas being a cleaner and cheaper fossil fuel also helps.
Domestic gas production has also increased, so have imports. The city gas distribution (CGD) network expansions and new circle additions will accrue benefits to GAIL. The increasing pipeline infrastructure is positive for volumes, and rising regasification capacities bode well for higher imports.
The National Green Tribunal (NGT) has been stressing on the need to reduce pollution, which means an increased push for natural gas. Analysts at Motilal Oswal Financial Services Ltd expect a 90% rise in the length of trunk pipelines over the next few years. They also expect a 57% increase in the availability of liquefied natural gas or LNG and a 30% increase in domestic gas availability.
All this augur well for GAIL and the gas sector in general.
The brokerage expects GAIL to see at least a 5% compounded annual growth rate in gas transmission volumes over the next five years. Another upside to gas volumes is the commissioning of fertilizer plants in the country.
“The volumes already have increased 4-5% (currently 115 mmscmd), with 4.5 mmscmd gas from Reliance Industries, and Ramagundam fertilizer plant drawing 2.5 mmscmd," analysts at Credit Suisse wrote in their 6 August note. Moreover, full commissioning of four more fertilizer plants in east India should add another 7.5-9.5 mmscmd by mid FY23, they point out. Mmscmd stands for million standard cubic metres per day of gas.
The starting of supplies to five fertilizer plants will also improve the placement of imported gas contracts. Besides improved demand, higher gas prices also bode well for increased placement of imported gas cargoes and the company’s gas trading segment.
But the flip side of rising gas prices is the impact on the profitability of the LPG (liquefied petroleum gas) and petchem segments. This is because the company uses domestic gas as feedstock for both segments. That said, petchem prices have begun to inch up, providing some respite.
Last month, the company also announced that it would foray into hydrogen generation and scale up its renewable portfolio.
Despite these positives, shares of GAIL have hardly moved in the past month. As such, they have underperformed the broad market so far in 2021.