The firm’s overall performance rode on the 50 per cent jump in gas trading profits. The improvement in margins was surprising, given the weak demand-supply situation.
Concerns over placement of the high-priced US gas contracts remain, even though GAIL
has consistently met with success in placing them and reporting good numbers. Analysts at Motilal Oswal say the company has hedged sufficient US cargo for FY20 and FY21, though it remains to be seen how these US contracts work in an environment of increasing LNG supply glut.
On the domestic front, the extremely challenging macro environment is marked by falling Asian spot LNG prices, which are currently just $2.5 per mBtu (million British thermal unit) lower than the landed cost of US LNG, say analysts. The Street will watch the trend in trading margins, while the near-term outlook for petrochemicals’ margins and other segments remains subdued.
Among the near-term positives is the commissioning of pipelines such as Kochi-Mangaluru. The company expects to complete this in a few months, which can provide some volume growth, says Nilesh Ghuge of HDFC Securities. Increased utilisation at Petronet LNG’s recent capacity ramp-up, which could boost transmission volumes, will add to the same, he added.
Ghuge, however, expects the Jagdishpur-Haldia and Bokaro Dhamra pipeline (JHBDPL) to boost volumes only after the second half of FY22.
In the long run, there is no doubt on GAIL’s prospects, considering the strong natural gas demand. Other factors are the continuous growth of piped natural gas and compressed natural gas segments, and the tightening norms on industrial pollution.
However, lack of clarity over restructuring of the firm is affecting outlook. Analysts at Motilal Oswal have lowered their valuation multiple from 9x to 8x on concerns over restructuring.
Prabhudas Lilladher analysts said valuations remain attractive but added that concerns over demerger of its pipeline network remains a concern.
They have also tweaked their FY20/21 estimated earnings to incorporate annual report changes and expect capital expenditure trajectory to pick up as all businesses (excluding pipeline) operate at near-peak levels.