Pipeline Expansions And LNG Contracts Will Strengthen India's Future Gas Market

Key Takeaways

• Expansion of pipeline infrastructure and completion of major petrochemical projects are set to significantly boost GAIL's future revenue and production capabilities.
  
• Strategic increases in gas transmission and favorable LNG contracts are expected to drive improved market presence and financial performance.
  
• GAIL's growth is challenged by declining earnings, reduced gas demand, pipeline execution risks, high sourcing costs, and volatile feedstock prices.

Catalysts

Operates as a natural gas processing and distribution company in India and internationally.

• GAIL's ongoing expansion of its pipeline infrastructure, including key projects like the Mumbai–Nagpur–Jharsuguda and Jagdishpur-Haldia-Bokaro-Dhamra pipelines expected to be completed by mid-to-late 2025, potentially boosts future transmission volumes and revenue.
  
• Completion of major petrochemical projects, such as the PDH-PP plant at Usar with a substantial capacity, is expected to enhance GAIL's production capabilities and revenue streams by FY '26.
  
• The anticipated addition of 80 new CNG stations and 1,20,000 DPNG connections over the next two years highlights GAIL’s focus on increasing its market presence in the City Gas Distribution (CGD) sector, which could drive future revenue growth.
  
• GAIL's strategic efforts to increase gas transmission volumes by approximately 10 to 12 MMSCMD year-on-year in the upcoming years are aimed at leveraging its pipeline infrastructure for better revenue generation.
  
• Long-term LNG contracts secured with more favorable pricing than existing ones could improve marketing margins and overall earnings in the coming years.

GAIL (India) Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming GAIL (India)'s revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.5% today to 7.5% in 3 years time.
• Analysts expect earnings to reach ₹114.3 billion (and earnings per share of ₹17.77) by about December 2027, down from ₹115.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹146.7 billion in earnings, and the most bearish expecting ₹93.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.6x on those 2027 earnings, up from 11.7x today. This future PE is about the same as the current PE for the GB Gas Utilities industry at 18.6x.
• Analysts expect the number of shares outstanding to decline by 0.73% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

GAIL (India) Future Earnings Per Share Growth

Risks

• GAIL has exhibited a sequential decline in gross turnover, PBT, and PAT from Q1 to Q2 FY '25, indicating potential growth challenges; this could impact revenue and earnings.
  
• There is a concern over reduced gas consumption by the power sector due to prolonged monsoon, which can affect future revenue from gas marketing.
  
• The company's dependence on completing numerous pipeline projects by certain timelines poses execution risks, potentially affecting future revenue and earnings growth.
  
• GAIL faces challenges in gas sourcing and participation in bids due to higher spot prices, which could impact its ability to maintain marketing margins and overall profit.
  
• There are ongoing variances in feedstock costs for petrochemicals, impacting segment profitability and potentially affecting net margins if volatility continues.

Valuation

• The analysts have a consensus price target of ₹234.19 for GAIL (India) based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹290.0, and the most bearish reporting a price target of just ₹148.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹1532.4 billion, earnings will come to ₹114.3 billion, and it would be trading on a PE ratio of 18.6x, assuming you use a discount rate of 12.2%.
• Given the current share price of ₹205.82, the analyst's price target of ₹234.19 is 12.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.