Pipeline expansion, tariff revision could be game-changers for Gail

These include a 3,300 km pipeline connecting north India to the eastern region and a 1,700-km pipeline connecting Mumbai to the central and eastern regions. Five the the six – barring the one in Jammu – are slated to be commissioned by June. “Gail should gain share in transmission on the back of two major pipelines commissioning in FY26,” said analysts from Jefferies India in a report on 3 December.

Gail’s LNG terminal on the west coast is also expected to be completed by February after several delays, which will reduce its reliance on other terminals for regassification and thus save on operational costs. Gail is also investing about ₹17,000 crore in several petrochemical expansion and efficiency improvement projects, which will be progressively commissioned by October. 

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Indeed, Gail’s debt-to-equity ratio of 0.24x at the end of September offers sufficient financial comfort to undertake all this capex. While petrochemicals contributed 6% of Ebitda in the September quarter (Q2FY25), its share can be expected to rise with improved sourcing of raw materials and lower losses during production, led by better efficiency.

Meanwhile, increasing domestic gas consumption and the anticipated increase in gas availability will be favourable for Gail. Over January-October, gas consumption in India rose 12% year-on-year, driven by a drop in global prices. The expected addition of nearly 8 million standard cubic meters per day (mmscmd) of gas by Oil and Natural Gas Corp Ltd from FY26 also augurs well for Gail’s transmission business.

Petition to hike tariffs

Gail submitted a petition to increase its transmission tariff to the Petroleum and Natural Gas Regulatory Board (PNGRB) in September and expects it to be approved by March. “We see the likelihood of a rerating of the transmission business if a tariff hike ensues by March,” said Jefferies.

While Gail’s stock is down about 16% from its 52-week high of ₹246.30 on 31 July, it has gained 27% so far in 2024. The expected tariff revision is key to further movement in the stock.

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The almost 40% cut in gas allocation under the administered price mechanism (APM) for city gas distribution (CGD), which forced them to look for alternative sources of supplies, opens up another market for Gail. It now “has an opportunity to source and market more volume in terms of LNG to meet those demands which have come up because of de-allocation”, management said in its Q2 earnings call.

Still, slower-than-expected recovery in domestic gas demand could weigh on volumes in the gas transmission and marketing segments. In the September quarter, Gail’s gas transmission volume rose by 9% year-on-year to 130.6 mmscmd, in line with its full-year guidance of 130 mmscmd. However, marketing profit margin was hurt by higher sourcing from the spot market, which is costlier than long-term contract price. Transmission brought in nearly 40% of Gail’s Q2 Ebitda, while marketing’s contribution was 34%.

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Note that a sharp spike in gas spot prices in case of a harsh winter and delays in commissioning of petchem projects pose risks to Gail’s earnings. “The gas transmission business has good prospects, but the commodity business (LPG, gas marketing, petchem) would be volatile,” said a report by Anand Rathi Share and Stock Brokers.