Hold “ buy ” on GAIL with TP increase of Rs 173

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Gas demand ends up increasing: The long-awaited commissioning of the HURL fertilizer factories in Gorakhpur, Barauini, Sindhri and Matix has started and is expected to stimulate gas demand for GAIL.

GAIL, LPG production, CGD networks, Urja Ganga pipeline, natural gas trading

The commissioning of customer projects, the completion of pipelines and rising oil prices bode well for gas demand and GAIL. Raise the target price to Rs 173 (from Rs 156) and maintain the “buy” rating as the stock is still trading 15% below its 10-year average base PE.

Gas demand ends up increasing: The long-awaited commissioning of the HURL fertilizer factories in Gorakhpur, Barauini, Sindhri and Matix has started and is expected to stimulate gas demand for GAIL. A return to normalcy and the start of public transport will further increase the demand for town gas distribution networks (CGD). In this context, as sections of GAIL

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The Urja Ganga pipeline is commissioned, new sources of demand should emerge. Elimination of natural gas trading losses and improvement of LPG / petchem seem likely: In fiscal year 9MFY21, GAIL suffered Rs 8.9 billion losses on natural gas trading as demand in India was declining and that it had to sell a significant amount of LNG cargo outside India. As demand recovers and LNG prices remain at moderate levels, we expect segment profitability to return. In FY20, this segment represented 23% of EBITDA. Likewise, the LPG segment is benefiting from the increase in crude oil prices and Petchem is benefiting from the improvement in naphtha spreads.

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Ready for a longer-term growth path: current GAIL pipelines are currently 54% utilized. As demand increases, increased usage should have a direct impact on the bottom line. In addition, a significant portion (around 20% of gross fixed assets) remains under construction. The commissioning of sections of these pipelines (7,500 km under construction on an existing 12,500 km pipeline) should stimulate demand and improve the company’s ROE.

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