Concerns about US HH contracts to subside soon
* The completion of three fertilizer plants along the Jagdishpur-HaldiaBokaro-Dhamra pipeline (JHBDPL), combined with the contribution from Matix Fertilizer start-up and Mangalore Chemicals and Fertilizers (MCFL) conversion, is likely to de-risk ~60% of total US Henry Hub (HH) contracts.
* The increase in domestic gas availability could boost gas transmission of GAIL by ~30% by FY23.
* Trading at ~40% discount to long-term one-year forward P/E of 14x, GAIL presents an attractive investment opportunity, in our view
Fertilizer plants to de-risk concerns about US HH contracts
* The completion of three urea plants (Gorakhpur, Sindri and Barauni) by Hindustan Urvarak & Rasayan (HURL) in addition to Ramagundam Fertilizers and Chemicals is expected to add 9.4mmscmd of marketing volumes for GAIL over the next 3-4 years.
* The start-up of Matix Fertilizer and the conversion of Mangalore Chemicals and Fertilizers from naphtha to gas could add 3.1mmscmd of sales.
* These would account for 60% of total US HH contracts and help in substantial de-risking of the same.
* Additionally, the commencement of the JHBDPL and Kochi-Mangalore pipelines would generate ~5mmscmd of transmission/sales demand from Barauni, Haldia and Mangalore refineries
Transmission volumes to increase by 29% over FY19-23
* ONGC’s KG-DWN-98/2 is expected to commence gas production in Dec’19, which is likely to ramp up to ~14mmscmd by FY22.
* Gross production from RIL’s R-cluster, Satellite fields and MJ field is expected to contribute a total of ~30-35mmscmd by FY23.
* Considering that most potential users in the KG basin are power plants that may not be able to take high cost KG basin gas, even 70% routing of KG basin gas to west coast could boost transmission volumes of GAIL by 29%
Focus on industrial pollution bodes extremely well for transmission/sales volumes
* In Mar’19, the National Green Tribunal (NGT) passed an order banning all coal gasifiers in Morbi. As a result, consumption of gas almost doubled in that region.
* In Jul’19, the NGT passed another order for the Central Pollution Control Board (CPCB) to file compliance report on critically and severely polluted industrial clusters across India within three months. It has asked for strict action against such units.
* We believe that gas would have a central role to play in reducing air pollution in such industrial clusters and that the strict enforcement may result in a significant jump in gas volumes.
* This renewed focus may significantly boost GAIL’s transmission and marketing volumes.
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