LNG duty cuts to boost GAIL’s earnings

Petrochem segment would benefit from lower feedstock prices and improving utilisation

The proposed halving of Customs duty on LNG imports to 2.5 per cent was cheered by the Street with most gas-related stocks such as GAIL, Gujarat Gas, Petronet LNG, Indraprastha Gas (IGL), etc. recording gains. While all these companies stand to gain from the duty cut, there are more triggers for GAIL.

The government, in an effort to push LNG imports and improve natural gas availability, has taken the step to cut import duty. City gas distributor IGL uses about 22 per cent of LNG, while Gujarat Gas imports 3.5 million metric standard cubic metre per day (mmscmd) of gas. The savings could potentially add about 1.5 per cent to IGL’s profits and 10 per cent to Gujarat Gas’ profits, according to calculations of analysts at J M Financial. Nevertheless, even as the benefits will be passed on to customers, it will lead to demand improvement accruing positives to volumes and revenues of all gas marketing and trading companies like GAIL. But, more benefits will flow to companies that also consume gas, like GAIL, which uses imported LNG as feed stock for petrochemicals production.

Analysts say, looking at the current production and pricing of LNG, GAIL could see profits of petrochemical segment improve by ~102 crore per annum. This is a further boost to the company’s earnings that has been seeing earnings upgrades in the petrochem segment, leading to a revival in fortunes.

The company, about a year ago, was seeing losses in its petrochem segment on the back of usage of high-priced imported gas under long-term contract. But, after renegotiation of its long-term contracts and after some delays in stabilisation of expanded capacities at Pata in Uttar Pradesh, the profitability has been improving. The lower feedstock costs after the cut in Customs duty will benefit further. Added to this is the boost to company’s transmission and marketing revenues on the back of duty cuts.

GAIL’s stock price hit a 52-week high of ~493 a few days ago, and continues to trade at ~478-levels now.

While the company may see some softness in the third quarter performance due to demonetisation, analysts expect prospects to improve further going ahead. “A strong recovery is expected in LPG and liquid hydrocarbon earnings for GAIL, driven by the estimated $70 per tonne improvement in LPG prices in second half over first half, can potentially drive a ~200crore uptick in Ebit over first half and annual EPS impact of ~2.3 per share,” say analysts at IDFC securities. Additionally, the higher utilisation of the expanded petrochem capacity coupled with increase in margins can drive a sharp uptick in earnings from this segment. Thus, GAIL is likely to see good momentum in its earnings.