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Stock pick of the week: Why GAIL India can be a good bet for long-term investors

Expected growth in transmission volumes because of the ongoing ramp-up in the natural gas ecosystem will benefit GAIL. This and other plus points make the company a favourite of analysts.

, ET Bureau|
Aug 26, 2019, 06.30 AM IST
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Long-term investors should make use of the short-term correction triggered by uncertainty.
First quarter results of GAIL India were as per street expectations. The strong performance by the natural gas marketing and transmission segments offset the muted performance by the petrochemical and LPG segments. Though gross profit of marketing and transmission segments zoomed 54% and 22% respectively, it’s overall EBIT remained flat because of its planned shutdown in the petrochemical segment.

While revenues of the petrochemical segment fell by 31% y-o-y in the first quarter, it was forced to report a gross loss compared to a gross profit during same period last year. However, the petrochemical plant has resumed operations and production is normal now. The lag from this segment won’t be there in the second quarter numbers. Despite the fall in petrochem prices, GAIL should be able to protect its margin because natural gas prices are staying low.

It is the 15% jump in transmission tariff that helped the transmission segment perform well during the first quarter. However, analysts are hopeful the transmission volume will increase in coming years because of the ongoing capacity rampup in the natural gas ecosystem. For example, the Indian economy is now investing heavily in natural gas related areas like city gas distribution system, re-gasification terminals, conversion of fertiliser plants to natural gas, etc. This momentum is expected to increase due to the prevailing low natural gas prices. Being the largest player in India—GAIL owns more than 2/3 of the country’s natural gas pipeline network, it is in a sweet spot to benefit from this. GAIL’s own pending projects, like the delayed Kochi-Mangalore gas pipeline, will be another trigger for transmission volume.

GAIL’s trading profit is expected to remain elevated because of its exposure to the US. New LNG terminals coming up there will keep the global natural gas prices low and this in turn will help GAIL generate healthy trading margins.

Despite the long-term positives, the counter is under pressure now due to uncertainties triggered by the government’s plan to hive off its pipeline assets to a separate company and sell majority stake in it. Though this hive-off plan has increased momentum now, there is no guarantee that this decade-old plan will be implemented now. Even if implemented in the near future, this will be a value unlocking opportunity for investors. Long-term investors, ready to withstand short-term hiccups, can consider this counter.

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GAIL compared with ET Oil & Gas and Sensex. Stock price and index values normalised to a base of 100. Source: ETIG and Bloomberg.

Selection Methodology: We pick up the stock that has shown maximum increase in “consensus analyst rating” during the past month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it. You can see similar consensus analyst rating changes during the last one week in ETW 50 table.

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