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Research
GAIL - Volumes Woes Continues; Gas Price Hike could be a further Dampener - Karvy
Posted On : 2013-07-04 21:18:55( TIMEZONE : IST )
The reduction in volumes from KGD6 has reduced the transmission volumes to 99 mmscmd from 120 mmscmd. Incremental production from fields of ONGC and Dahej and Kochi terminal expansions are not expected o fetch significant volumes for GAIL in next couple of years. Besides, probable domestic gas price hike is expected to shrink Petchem and LPG margins and negate increase in profitability due to reduction in subsidy burden and petchem expansion.
Lack of Core demand puts Volumes under Pressure
Gail India has been primarily meeting demand for core sectors through its pipelines from the domestic fields of Mumbai and KG Offshore. However, as the domestic gas production weakens in the next few years, transmission volumes of Gail India is expected to be under pressure. The demand from noncore sectors is unlikely to make a meaningful chunk of volumes for an
existing capacity of 200 mmscmd and upcoming capacity of 220 mmscmd.
Margins likely to be under Pressure
Softening crude oil price is expected to trim petchem and LPG, LH realizations. Any price hike in the domestic gas is expected to shrink the margins further as LPG extraction and polymer units use domestic gas for extraction. We expect a contraction of Rs. 1.5 in the EPS per $/mmbtu increase in the gas price. This would negate the positive impact of softening under recoveries and expansion at PATA.
Valuations although Cheap; to remain under Pressure
The volumes are expected to stay lull until there is a substantial increase in the domestic production and some drastic reforms within the core segment users (Power and Fertilizer). The margins are expected to shrink as the trading margins are at peak and petchem and LPG margins are likely to be under pressure as domestic gas price gets hiked. We expect ROEs to dilute as operating rates of pipelines get lower and margins shrink. We reiterate our HOLD rating on the stock with a revised TP of Rs 329 at 9x FY15E.
