GAIL Core Business Strength to Drive Growth

gail share

The state-owned natural gas processing and distribution company, GAIL fared reasonably well during the fiscal third quarter to December 2019.

The company reported 17.5% rise in net profit at Rs 1,250 crore even though its revenue fell 1.5% to Rs 17,767.3 crore.

Earnings before interest, tax, depreciation, and amortisation rose 32.6% to Rs 2,072.4 crore while operating margin expanded to 11.7% from 8.7% in the preceding quarter.

The improvement in the outlook for core business should lend a supporting hand for the company’s showing on the financial front as well on the bourses going forward.

GAIL (India) enjoys a dominant position in the domestic gas utility business.

It is primarily engaged in gas transmission and marketing businesses. It owns 10,900 km of gas pipelines and holds a 78% market share in India’s natural gas transmission business.

GAIL also owns and operates gas-based petrochemical plants with a capacity of 880 ktpa and LPG-LHC production facilities.

The company also holds a substantial interest in city gas distribution business with stakes in CGD companies or through subsidiaries. It also owns LNG import terminals

Outlook for the core business has improved given expectation of pick-up in gas transmission and trading volume.

The company is investing an aggregate amount of Rs164bn on 3384kms of new pipelines (16 mmscmd capacity) to expand GAIL’s cross country gas network further in the northern and eastern states of UP, Bihar, Jharkhand, West Bengal and Odisha under the PM’s URJA Ganga Project.

This includes Rs129bn on the JHBDPL Phase I and II (2655km) and Rs35bn on JHBDPL Phase III – Barauni Guwahati pipeline (BGPL 729kms).

We expect the Indian natural gas demand to boom over the next 3-5 years, driven especially by the massive nation-wide expansion in CGD at an estimated cost of Rs700bn-Rs1trn over FY20-FY29E as well as incremental growth from fertilizers, refining, and other users.

The robust gas demand growth supported by matching supplies will likely fuel growth in GAIL’s gas transmission and trading segments are given its 70%/60% market share in these businesses.

The margins from commodity segments – gas marketing, petrochemicals and LPG and propane (LPG & HC) may remain subdued until we see overall demand and pricing outlook improve, especially in petrochemicals, which could take some more time to stabilize.

Hence net net GAIL looks all set to grow at a healthy pace ahead over the next 3-5 years.

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