Trading Segment Leads GAIL in Q1, but Russian Gas Supply Worries

NEW DELHI : Short-term uncertainties regarding supplies from Russia are causing markets to be cautious despite the fact that GAIL India Ltd announced strong figures for the quarter ending in June. The stock continued its descent and closed down 5.17% on Friday.

The company’s reported net profits 2,915 crore was up 90.5% year over year (year-on-year) and 9% sequentially. That was better than Bloomberg’s consensus earnings estimate of 2,416 crores. It recorded a 116% increase in operating revenue 37,572 crores in Q1FY23. On a sequential basis, revenue increased 39%.

This was driven by the strong performance of the gas trading business, which saw revenue more than double on an annual basis and increase more than 50% sequentially. The segment’s profitability remains solid and analysts attribute it to the very high spreads between Asian liquefied natural gas (LNG) prices and American benchmarks from the Henry Hub. Even gas transmission activity was supportive, although volume growth was weaker and analysts attributed this to higher gas prices.

Nevertheless, these segments compensated for the weakness of the petrochemicals segment, which experienced a significant drop in volumes even though realizations remained favorable. The company attributed the positive results to increased gas marketing and transportation volumes, better marketing distribution and higher product prices.

The company’s earnings before interest, taxes, depreciation and amortization (EBITDA) at 4,365 crore improved 81% YoY and 17.5% sequentially.

Despite the brisk pace, concerns on the street are tied to dwindling gas supplies from Russia. Analysts said gas trading volumes remained strong in the first quarter, up 5% year-on-year, but this segment will remain weak in the second quarter of FY23, driven by a loss in volumes due to Gazprom’s supply problems.

GAIL has a portfolio of 14 million tonnes per year of long-term LNG contracts from various sources, including Gazprom, he said. There have been supply disruptions under the contract since late May 2022 and Gazprom has failed to deliver eight shipments to GAIL. In June 2022, GAIL only received one shipment of LNG.

If Gazprom triggers the force majeure clause, it will cause gas prices to rise, according to analysts at Motilal Oswal Financial Services Ltd. This could result in slightly lower consumption as some consumers may not be able to afford higher gas prices.

Gazprom’s inability to supply LNG under contract to GAIL since June could impact marketing volume by 5-6 million metric standard cubic meters per day (mmscmd) and transmission volume by 6-7 mmscmd, as well as petrochemical plant usage during Q2FY23, according to Elara Securities India Pvt Ltd.

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