We recently interacted with the Management of GAIL (India) Ltd. to understand the latest developments in gas trading and petrochemical segment. The key takeaways of the interaction are enumerated hereunder. GAIL has sold 70% of US LNG in deals with the term extending up to 20 years to several domestic LNG consumers, including spot/medium-term LNG buyers and fertiliser companies.
Fertiliser companies can purchase domestic/LNG up to price of $9/mmbtu for urea production. GAIL has earned $0.7/mmbtu gas trading margins on US LNG during 9MFY19. If we assume 70% of US LNG volume to earn a margin of $0.35/mmbtu in the long-term then it suggest 2.5% upside to our target price. We revise our Target Price to `388 primarily on the back of market value of investments.
The management expects its petchem plant in Pata (UP) to operate at >95% utilisation in 4QFY19 and maintains guidance of 90%/95% for FY20E/21E. It successfully launched metallocene, which carries 5-10% higher margin vis-à-vis other polyethylene products. Its petchem plant consumes a mix of gas from “S1” ONGC field (procured at market rate) and LNG.
We expect GAIL’s petchem margin to recover from 4QFY19 onwards.
The Petroleum & Natural Gas Regulatory Board (PNGRB) is likely to hike HVJ and DVPL tariffs in the next six months.
As per our back-of-the-envelope calculation, GAIL currently earns `39/mmbtu (volume weighted average) on total pipeline network. Post hike in HVJ & DVPL tariffs, GAIL’s weighted average pipeline tariff is expected to improve to `48/mmbtu in FY20E. Our model suggests that every `2.5/mmbtu rise in tariff can potentially ensure 3% upside in GAIL’s FY20E-EPS.
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