Recommendation from Gas Distribution sector

This section gives a recommendation of a stock having a stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

GAIL (INDIA): ENERGISED TO PERFORM

HERE IS WHY
✓Strong revenues from natural gas trading
✓Wide transmission network
✓Consistency in CFO and PAT

India is the third-largest consumer of energy in the world. Due to expanding infrastructure and supportive environment regulations, India’s medium-term forecast for natural gas consumption remains positive. Natural gas currently makes up roughly 6.7 per cent of India’ energy mix and is driven by a goal of increasing it to 15 per cent by the year 2030. Owing to the strong outlook in the natural gas segment, our low price scrip recommendation for this issue is GAIL. The company owns and operates over 14,500 km of natural gas pipelines as well as 2,023 km of LPG pipelines, five LPG gas processing units and a petrochemicals facility. 

GAIL has also forayed into renewable and alternative energy sources such as wind, solar, compressed biogas and green hydrogen in order to shape a net zero status for future generations.

In FY22, the company derived 77 per cent of its revenue from natural gas trading, followed by 7 per cent from petrochemicals, 5 per cent from natural gas transmission, 4 per cent from LPG and LHC and 1 per cent of from LPG transmission. In Q3FY23, GAIL posted consolidated revenue from operations of ₹35,884.51 crore that grew by 37.25 per cent YoY. Its EBITDA declined by 72.95 per cent YoY and stood at ₹1,480.70 crore.

The net profit saw a YoY decline of 89.54 per cent and sequentially declined by 69.52 per cent to stand at ₹397.59 crore. All this was due to a one-off inventory loss, lower price realisation in petrochemicals and liquid hydrocarbon segments and higher fuel costs of natural gas transmission. GAIL’s net profit fell in Q3FY23 because it transmitted less gas due to supply disruptions from one of its suppliers, Gazprom PAO. In 2012, the company agreed to a 20-year contract with Gazprom PAO to purchase 2.5 million tonnes of LNG per year. Gazprom PAO, on the other hand, has been diverting LNG supplies since May 2022, taking advantage of rising global gas prices, and has defaulted on its contract. 

As a result, GAIL was forced to reduce client supplies. It is currently looking for long-term gas import contracts and hopes to sign one soon to compensate for disrupted supplies. Through new pipeline tariff regulations, the Petroleum and Natural Gas Regulatory Board (PNGRB) has made favourable changes for gas pipeline operators. The combination of new regulatory measures for pipeline tariffs, increased domestic supplies, a moderated drop in spot LNG prices and some traction in petrochemical and LPG sales prices should result in a material improvement in the company’s earnings over FY23. The management anticipates a nearly 25 per cent increase in blended tariffs if all the measures are implemented as planned and PNGRB makes no cuts.

This could be a significant driver of earnings growth for the company in FY24-25. With regards to its trailing 12 months (TTM) status, GAIL is trading at a PE of 8.23 times which is slightly higher compared to its three-year median PE of 8.23 times. However, it looks cheaper compared with the PEG ratio of 0.27 times and the industry average PE of 12.1 times. The company’s compounded five-year sales and profit growth stands 13.73 per cent and 24.23 per cent, respectively. The company has interest coverage of 74.31 times over debt to equity of 0.11 times. Given that it has maintained an average five-year CFO and PAT of 1.25 times, we recommend BUY.