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GAIL’s Q2 profit down 47% on poor gas transmission, LPG profitability

GAIL India posted a sluggish performance for the quarter ended September. Despite steady volume growth, operating performance was impacted by one-offs in the trading and gas transmission segments. This coupled with poor LPG & liquid hydrocarbon segment profitability resulted in a sub-par performance. Operating profits which were down 30.8 per cent sequentially slid by 47 per cent year-on-year.

The shut down at some fertiliser plants and delay in commissioning of few others led the company to sell some contracted volumes in the spot market impacting profitability in the gas marketing segment. Gas transmission segment too saw 10 per cent decline in profitability with company taking one-time hit for retrospective adjustment in tariffs of some pipelines that had seen downward revision in tarrifs, said analysts.

The natural gas prices continue to decline while petrochemical profitability too is under pressure given the supply glut. Prices of petrochemicals and liquid hydrocarbons declined by 8 per cent and 25 per cent respectively which coupled with lower gas prices in international market adversely impacted the profits Q2 as compared to Q1 in the current financial year, said the company.

Going ahead, while concerns on petrochemical LPG and liquid hydrocarbon segments remain due to realisation pressures, gas trading and transmission segment which contributes more than 80 per cent to overall revenues could see a recovery. The soft gas prices, better gas availability in the country too will boost demand. Geographical expansion by city gas distributors and pollution curbs on industrial units are expected to drive growth. Analysts at Motilal Oswal Financial Services see gas transmission volumes of GAIL rising 30 per cent by FY23 with improved gas availability.

Transmission volumes will also be boosted by Petronet LNG’s recently added capacity ramps-up. The Kochi-Mangalore pipeline is expected to be commissioned in Dec-19 while the completion of pipelines in East India will boost volumes in long run. Take or pay clauses for fertilizer plants should kick in after 2019, points out Nilesh Ghughe at HDFC Securities.

Analysts at JM Financial continue to believe that the current market price already captures most of the negatives and therefore, maintain positive view on the company. The stock has corrected almost 29 per cent over the last one year. Target prices of MOFS, JM Financial and HDFC Securities indicate 15-52 per cent upside for the stock.
Source: Business Standard

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