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The Indian oil and gas sector is one of the core industries that play an essential role in developing other sectors in the economy. Therefore, the demand for oil and gas will grow more, making the industry favorable for investment. The government has allowed 100% FDI in the natural gas and petroleum sector to fulfil the increasing energy demand. Today's industry attracts foreign and domestic investment, as can be seen by the presence of Reliance Industries (NS:RELI) and Cairn India (NS:CAIL).
As per the projections of India Energy Outlook 2021, primary demand for energy will double to around 1123 mn tonnes of oil equivalent as the country's GDP will reach USD8.6 trillion by 2040.
By 2040 consumption of Natural gas is expected to reach 143.08mn tonnes.
In FY 20, India imported 33.68 bcm of LNG. Annually 9% of growth has been predicted in natural gas consumption till 2024 by the International Energy Agency, equivalent to 25 bn cubic meters. 40% of this demand will be from industrial consumers. Residential, energy and transport sectors will also create order and drive growth. According to IEA, due to rising infrastructure and related environmental policies, the medium-term outlook for natural gas consumption remains solid.
During FY20, petroleum products consumption grew 4.5%, whereas exports of petroleum products increased in FY20 to US$35.8bn. (GAIL) has the largest share of 18,834 km of the natural gas pipeline network (32,718 km) as of June 31, 2021.
GAIL Ltd (NS:GAIL) (India)
GAIL India Ltd., formerly known as Gas Authority of India Ltd., was established in August 1984 under the Ministry of Petroleum & Natural Gas (MoP&NG). GAIL is a listed and publicly owned company and is the market leader in the natural gas segment in India. Its headquarter is in GAIL Bhawan, New Delhi. It is responsible for the processing and distribution of Natural gas across the country.
Initially, the company started with the construction, operation & maintenance of the Hazira - Vijaypur -Jagdishpur (HVJ) pipeline project. An 1800 km long pipeline was constructed worth Rs1700 crore under the project, which opened various avenues for developing the natural gas market in the country. Now, the company has diversified into other segments such as LPG Transmission, Petrochemicals, City Gas Distribution, E&P, Liquid Hydrocarbons, GAILTEL, and Renewable energy. Gas Authority of India Ltd. (GAIL) has the largest share of 18,834 km of the natural gas pipeline network (32,718 km) as of June 31, 2021.
In Gas transmission, GAIL has 70% market share while holding 50% market share in gas trading. GAIL has a significant market share in the LNG and City gas distribution segments.
Fundamentals
The table above shows the data for the last four financial years. The data reveals rising cash flow from operations (CFO) which was 8768.7 cr in the year ended March 18 and rose to 8993.4 cr in Mar 2021. EBITDA margin, which is the ratio of EBITDA to Revenue, also increases to reach 17.6 % in Mar 2021. We can see that total assets rose from 61334.1 cr in Marc 18 to 81385.0 Cr in March 21.
The long-term Debt to Asset Ratio is increasing, which can cause concern. Further, Cash flow from Investing and Financing activities is negative, indicating outflow of cash for investing and financing activities.
The graph above shows the Revenue and EBITDA statistics of GAIL wherein GAIL reported revenue of 57151.77 Cr and EBITDA of 10062.54 Cr. in FY21
The outlook for the company looks positive as the management expects an increase in gas demand of around 6-8% because of the investment in end-use segments - City Gas Distribution and Fertilisers. Next year five urea-based projects will start operating at full capacity to draw 10-12mmscmd gas. CGD and new urea-based projects will prove to be a catalyst in the growth of the company's gas transmission and marketing segment.
- In the Indian gas market, the Unified tariff is beneficial for the expansion of long-term volume.
- Further, the JHBDPL project will support gas transmission and trading earnings. In FY20, the Gas Transmission and trading segment contributed 68.7% to EBITDA.
GAIL is the gas transmission and marketing segment leader with 70% and 50% share, respectively, so it is most likely to gain from growth in these segments. It could boost earnings for the company.
- Due to higher profits from petrochemicals and trading, Q2 earnings FY22 have been quite impressive, with EBITDA at Rs34.7bn and PAT was at Rs28.3bn. Removal of restrictions post covid and the high volume of petrochemicals lead to greater earnings.
By 2040, Natural gas consumption will likely increase at a CAGR of 4.18% from 58.10 mn tonnes in 2018 to 143.08mn.
Valuation of GAIL
As per the company's recent financial statement, its P/E ratio is 9.8, which shows the market price of the stock compared to its EPS. Enterprise Value to EBITDA depicts the number of years a company takes to recover its cost of acquisition; in FY 21, EV by EBITDA was 6.66 while it was 3.14 in FY20.
The company's prospects look good as the gas volume business will potentially rise in the coming years. GAIL financials show a positive picture. The company is also planning to expand its business in the renewable sector and build infrastructure in petrochemicals, gas transmission, and CDS.
GAIL India being a PSU, is its biggest downside. There will be government intervention when it comes to dividends, subsidies, etc. This is one of the reasons why GAIL India has been a relative underperformer to its benchmark.
Petronet LNG Ltd (NS:PLNG)
Petronet LNG Ltd. was formed in April 1998 by the government of India as a joint venture between 4 leading oil and gas PSUs having 50% shareholding. The company was incorporated to import and set up Liquified Natural Gas (LNG) terminals in the country. The company's independent board handles the development of LNG storage, import, and regasification facilities. The company has an authorized capital of 3000 crores and a paid-up capital of 1500 crore.
The shareholding pattern of the company is - Four PSUs, Gas Authority of India Limited (GAIL), Oil and Natural Gas (NS:ONGC) Corporation Limited (ONGC), Indian Oil (NS:IOC) Corporation Limited (IOC), and Bharat Petroleum (NS:BPCL) Corporation Limited (BPCL) provide 50% of the equity. Public, Mutual Funds, FIIs invest the rest 50%.
In Dahej, Gujarat, the company has set up the first LNG receiving and regasification terminal having 15 million metric tons per year of capacity. Another terminal operates in Kochi, Kerala. Some of the services offered by the company are regasification, bunkering, gassing-up and cooling-down facilities, storage and reloading, and truck loading facilities.
Fundamentals
The table shows the company's financials indicating measures of growth and profitability. Net Income is rising over the years; it rose from 2110.44 cr in FY18 to 2939.23 cr in FY21. EBITDA margin shows EBITDA as a percentage of Revenue; it was 11.9% in FY18, which rose to 19.5 % in FY21.
The debt to asset ratio is also rising from 16.6% in FY19 to 27.3% in FY21. However, compared to FY20, the proportion has declined by 3.29% in FY21. In FY21, Cash flow from operating activities is 3559.23 cr
Valuation of Petronet LNG
The price to earnings (PE) ratio depicts the market price of company stocks as a percentage of its earning per share; here, the PE is 11.47 in FY21, which has reduced from FY19 levels of 16.92%. Similarly, the price to sales ratio has been rising. EV to EBITDA ratio provides a company's monetary value or assessed worth. Typically values below 10 are healthy; here, FY21 has a 6.54 EV to EBITDA ratio, which is considered good.
Peer Comparison
The data pertains to the current financial year, FY21. The market capitalization of Reliance is approx 16 lakh crore at the same time, Petronet LNG has a market cap of 32,745 cr. The trailing-twelve-month PE ratio is 10.89, whereas ONGC and Oil India (NS:OILI) stand at 5.26 and 5.28, respectively.
What lies ahead?
Prospects of Petronet LNG look positive with the scope of growth in coming years. The company is expanding business by building the utilization capacity of plants and constructing infrastructure for the smooth functioning of its business. Therefore, the company's future outlook remains positive from the growth perspective.
Similar to GAIL India, Petronet LNG is also a PSU company and that remains its biggest downside. However, the company is debt-free, continues to generate cash from its core operations and hence remains relatively attractive than many of its peers. Until 2017, the stock has even generated decent returns for its shareholders.
The above two stocks (GAIL India and Petronet LNG) are the perfect examples of value stocks, however, there are other metrics that should be evaluated in detail. Hence, team Tavaga recommends that one should always consult a SEBI Registered Investment Advisor (RIA) like Tavaga before considering investing in any stock or financial product.
Disclaimer: The above write-up isn’t a recommendation, but should only be consumed for informational purposes.