Rising liquefied natural gas prices have made it profitable for GAIL (India) Ltd., the nation’s largest distributor, to sell the commodity in the domestic market.
The Singapore liquified natural gas prices, the benchmark LNG prices for Asia, have surged nearly 58 percent so far in the quarter ending June. GAIL buys LNG at contracted prices in the international market and sells at prevailing market prices in India—the business generates nearly 70 percent of its revenue.
GAIL has long-term contracts with the U.S. and Russia for delivery of more than 8 million tonnes per annum of LNG. Earlier, the gas trading business was suffering a loss as the prices in the domestic market were low. As a result, the landed cost of LNG was higher than the Indian spot price.
The contracted U.S. and Russia LNG prices are now at a discount to spot LNG, CLSA said. The recent surge in LNG prices, which is expected to stay till March 2019, might convert GAIL’s unsold long-term LNG from a big risk into an asset, according to the foreign brokerage.
Shares of the company have gained 4.8 percent so far this quarter compared to a 1.3 percent decline in the S&P BSE Oil & Gas Index. Of the 37 analysts covering the stock, only one has a ‘Sell’ rating, 27 rated it a ‘Buy’ and nine recommend ‘Hold’, according to Bloomberg data.
Rising oil prices are also expected to benefit GAIL’s liquified petroleum gas and petrochemicals segments, which contribute nearly 17 percent to its top line. Brent Crude, the Asian benchmark, has averaged around $75 a barrel so far in the first quarter of financial year ending March 2019—12 percent higher over the previous quarter.
The transmission business of the company, which contributes 10 percent to GAIL’s top line but has a 44 percent share in total earnings before tax and interest, is likely to benefit from an increasing demand for gas in India. Brokerages said a proposed unified tariff for gas transmission would also boost earnings.
GAIL has proposed a tariff of Rs 2 per standard cubic metres, 60 percent higher than the average tariff it earned in 2017-18. The company has a network of over 10,000 kilometres of natural gas pipeline in India.
Why The Sole Sell Rating
CIMB is the only brokerage which has a ‘Sell’ rating on the gas utility firm, Bloomberg data show.
The brokerage said a change in tariffs is not certain. Even if it happens, the benefit is contingent on factors like consumption of gas and utilisation of pipes. It also expects the petrochemicals business to face pricing pressure as capacity doubles in the country.
The domestic petchem capacity rose from 2.8 million metric tonnes to 5.6 million metric tonnes in the year ended March 2018 due to fresh supply from Reliance Industries Ltd., Brahmaputra Cracker and Polymer Ltd., ONGC Petro Additions Ltd. and GAIL.
The stock prices, CIMB said, is expected to remain under pressure because of plan to split the company’s transmission and market businesses, and a proposal by fuel retailers to buy a stake in GAIL.