Petchem and increasing transmission volumes might increase GAIL’s profits

Analysts predict that state-owned GAIL’s profitability will increase from FY24 to FY26 due to growing natural gas transmission volumes, new gas transmission pipelines, and improved petchem sector profitability.

According to the most recent report from Motilal Oswal, the firm is concentrating on two ambitious initiatives: expanding the availability of LNG in underserved regions via small-scale LNG projects and constructing a 4.3 tonne per day hydrogen production as part of its attempts to meet the 20% objective for hydrogen blending in natural gas.

“We anticipate that EBITDA will grow at a 14% compound annual growth rate during FY24–26E, primarily due to increasing natural gas transmission volumes, which are expected to reach 141 mmscmd in FY26 from 121 mmscmd in FY24. Additionally, we anticipate a significant improvement in the petchem segment’s profitability over H2FY25–FY26, which can be attributed to the start of operations of new petchem capacity and increased demand due to low global inventories. Finally, the report stated that during FY24–26E, these factors will be the primary drivers of the growth rate.

The business is in the midst of executing a green hydrogen project with an expenditure of Rs 230 crore. It has started blending hydrogen with natural gas at a rate of 2% in its city gas distribution (CGD) network at Indore.

Analysts at Nuvama Institutional Equities claim that GAIL has a “edge” due to its efforts to achieve net zero by 2040, which include hydrogen blending, green hydrogen generation, the establishment of CBG plants, and LNG dispensing stations.

According to the Motilal Oswal study, the small-scale LNG facility is now in its pilot phase but has the capacity to grow up, with the prospect of creating additional facilities in the future.

Analysts at Kotak Institutional Securities predict that GAIL would generate Rs 8,700 crore in cumulative free cash flow during the FY24–FY26E period, compared to a total net profit of Rs 28,600 crore. The company’s total free cash flow from FY18 to FY23 was Rs 11,200 crore, whereas its cumulative net profit was Rs 37,300 crore.

As it will probably continue to invest in capex-intensive projects, even if the projects’ potential low internal rate of return (IRR) makes us predict GAIL’s free cash flow to be low compared to PAT (profit after tax) in the future as well, the research said.

Due to lower spot LNG costs, the business also anticipates reasonable increase in transmission volumes during FY24–26E. It did, however, note that future development in gas transmission volumes is projected to be moderate due to sluggish CGD demand and limited new capabilities in the vital energy and fertilizer categories.

According to Kotak Securities, increased capacity utilisation at three new urea fertiliser plants and network charges at present elevated levels—which are 18–19% higher than the allowed rate of Rs 58.6 per mmbtu—will help drive up GAIL’s volumes in FY24.