|
| RESEARCH IT! >> IPO BUZZ! | |
Gas Authority of India
|
| Issue Summary |
| ||||||||||||||||||||||||||||
| Issue structure |
| Employees | QIBs | Non-Institutional Investor | Retail Portion | |
| No. of shares | Maximum of 4.2 m shares | Maximum of 40.2 m shares | Minimum of 20.1 m shares | Minimum of 20.1 m shares |
| % offered from Net public offer | Maximum 5% | Maximum 50% | Minimum 25% | Minimum 25% |
| Minimum Bid/Application size | 30 equity shares | Rs 50,001 | Rs 50,001 | 30 equity shares |
| In multiples of | 30 shares | 30 shares | 30 shares | 30 shares |
| Maximum Bid/Application size | Not exceeding 5% of the offer. | Not exceeding the size of the offer | Not exceeding the size of the offer | Not exceeding Rs 50,000 |
| Background |
|
Government of India established GAIL in 1984 in order to develop the pipeline infrastructure in different parts of the country. It is the largest natural gas transmission company in India and operates a pipeline network of around 4,600 kms across the length and breadth of the country. GAIL currently transports 63 million metric standard cubic meters per day (mmscmd) of natural gas, representing approximately 90% of the total amount of gas being transported through pipelines in India. It has ventured into other related businesses such as upstream activities of production and exploration and petrochemicals. It has 7 plants for processing of natural gas to produce LPG (liquefied petroleum gas), thereby adding synergistic value to the profile. | |
| Business | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Sale of natural gas is the company's principal business contributing around 70% to the topline. The company has 7 plants for processing of natural gas to produce LPG, which is sold to domestic as well as industrial consumers. It has also entered into joint ventures to market CNG (compressed natural gas) in cities like Delhi and Mumbai. GAIL operates a petrochemical complex located along the Hazira-Bijapur-Jagdishpur (HBJ) pipeline, with a production capacity of 260,000 tonnes per annum (tpa). Further, GAIL has ventured into telecommunications business with Gailtel having a reach of 8,000 kms, providing commercial bandwidth to customers. It also has a 12.5% stake in Petronet LNG, whereby it has a take-or-pay obligation of 60% of the regasified natural gas and 100% transmission rights. With the growing demand of natural gas in the country, it makes business sense for GAIL to acquire a stake in the company.
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Promoters | |
| GAIL India Limited is a flagship natural gas processing, transmission, distribution and marketing company with a GOI holding of 57.4% stake (post-issue). After extensive study that proved that the maximum economic value from natural gas should be derived only by extracting value-added products, GOI established GAIL in 1984 to set up a pipeline infrastructure across the country. | Sector | |
| The oil and natural gas sector has been traditionally regulated by the GOI. Till date, the pricing of natural gas is regulated. As per the 1997 pricing order, released by the MOPNG (Ministry of Petroleum and Natural Gas), gas price consists of consumer price, transmission charges, royalties and taxes. The consumer price is determined by way of a 75% reference to the international prices of a basket of fuels. The transmission charges to GAIL are fixed at Rs 1,150/MSCM for gas transmitted through the HBJ pipeline. Without making it further complicated, there are other aspects like calorific value of gas that determines the transmission charges. Further, the transmission charges shall increase by 1% for every 10% increase in the consumer price index. This escalation of 1% in charge is reimbursed from the funds of deposit in the Gas Pool Account. GAIL contributes Rs 2.5 bn to the Gas Pool Account, which is used as a mechanism to compensate Oil India Ltd, for concessional gas prices.
From the above tables, it is clear that in India, the natural gas market is underdeveloped. It must be noticed that predominantly, it has been the power and fertilizer industry that has been a major consumer of natural gas (almost 70% of natural gas consumption). Natural gas accounts for just 8% of the primary energy consumed in India. However, the consumption pattern indicates that the demand has been increasing and the share of natural gas is likely to rise even further. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reasons to apply |
|
Near monopoly and high entry barriers: GAIL currently accounts for 90% of the market share in case of natural gas transmission, which can be largely attributed to its vast geographical presence across the country. It has a presence in all the major industrial areas catering to over 400 consumers of natural gas. The high entry barriers for the business of transmission, marketing and processing of natural gas shall further help the company maintain its leadership in the long-term. The entry barriers are primarily large-scale investment requirements and the high lead-time before the assets generates a reasonable return on investments. | ||||||||||||||||
|
Increase in power generation capacities: As new power projects have been lined up to meet India's energy requirements, natural gas demand is likely to rise, given that it is a cheaper source as compared to naphtha. Further, it is expected that natural gas shall be preferred over other sources largely due to the fact that gas-based power plants need a shorter lead-time, can operate at a higher plant load factor and have lower capital and operating costs as compared to coal-based power plants. Moreover, the Petronet LNG relationship also brings synergies for the existing operations of GAIL. | ||||||||||||||||
|
Synergies within the business: GAIL's expansion in the LPG and petrochemicals business has been facilitated largely by the fact that the company has an assured supply of feedstock from its own supply of natural gas. Further, the company's vast pipeline network has enabled it to enter into joint ventures for retail gas marketing in various cities in India. With increasing acceptability of LPG as the primary medium of cooking gas, GAIL is in a better position to exploit the situation, which shall be largely driven by volumes. | ||||||||||||||||
|
Petrochemicals cycle uptrend likely to continue: Currently, the petrochemicals price cycle is witnessing an uptrend and we believe this is likely to continue for another year and a half. The fact that the per capita consumption of polymers (4 kg) in India is among the lowest as compared to international average of 20 kg indicates the vast scope for growth. Further, Indian companies spend, on an average, around 2% of sales on R&D as compared to international average of 18%. Considering the fact that GAIL has presence in this segment, we expect favorable prices to have a positive impact on profitability in the medium term. | ||||||||||||||||
|
Dual integration: Currently, GAIL sources its natural gas requirements from ONGC (84%), Oil India and consortia of joint ventures. However, the company has now ventured into upstream activities of exploration and production with strategic partners such as ONGC, Gazprom (Russia), OIL and Daewoo (Korea). This shall reduce the company's dependence on external sources for the supply of natural gas to some extent. At the same time, GAIL is setting up a national gas grid across the nation to enhance its downstream presence. This, when set up, shall help the company reach out to the yet untapped markets in the country. With natural gas demand likely to grow in the foreseeable future and growing LPG demand, GAIL shall be in a better position to capture a large chunk of the market. | ||||||||||||||||
|
Abolishment of Subsidies: Over the past few years, GOI has been reducing its share in the LPG and SKO (superior kerosene oil) subsidy bill and it is likely that in the next 2 to 3 years, the GOI's share will reduce to nil. As of now, GAIL is one of the companies, which is contributing to the subsidy bill. Going forward, we feel the oil companies shall not bear the burden and pass it on to the end users. This shall not only reduce GAIL's current outflow by way of subsidies, but shall also give the company a reasonable return on the products as per market determined rates.
| ||||||||||||||||
| Reasons not to apply |
Government regulation over prices: As per the Pricing order issued by the MOPNG, GAIL gets a fixed transmission charge of Rs 1,150 per MSCM of gas. Further, it receives an additional 1% on every 10% increase in the consumer price index, which is paid through the Gas Pool Account, in which GAIL has to contribute Rs 2.5 bn annually in quarterly installments with a lag of one quarter. If the government decides to continue it's the subsidies price scenario, GAIL will continue to suffer. Government regulations play a very important role in policies and to that extent, the risk profile of the stock is higher. | |
Deregulation in natural gas pricing: Natural gas price is currently regulated with a price band of Rs 2,150 per TSCM (thousand standard cubic meters) to Rs 2,850 per TSCM. However, it is expected that the GOI shall soon deregulate the prices of natural gas. In such a scenario, GAIL shall suffer to the extent that it uses natural gas as a feedstock in the LPG and petrochemicals business, thereby squeezing margins in a highly competitive environment. The company may not be in a position to pass on the additional burden to the consumers. | |
Intense competition in the petrochemicals and LPG business: GAIL faces stiff competition in the field of petrochemicals from established players like IPCL and Reliance Industries and with the entry of IOC, the competition is likely to intensify further. IPCL and Reliance together account for 70% of the polymer production capacity in India and are the market leaders. IOC has already committed an investment of around Rs 64 bn, which shall start operations by FY06. Besides, the GOI has reduced import duties of polymers to 20%. Also, as part of its commitments to various multi-lateral and bi-lateral trade agreements, India shall gradually eliminate tariff and non-tariff barriers on petrochemicals products. In the long run, GAIL shall face stiff competition from international players such as Exxon Mobil, Dow Chemicals and Royal Dutch/Shell, apart from domestic players. | |
LPG and kerosene subsidies: GAIL and ONGC have been roped in to share the subsidy on LPG and Kerosene and this shall have an adverse impact on the financials. Further, the share of the Government's contribution in the subsidy is decreasing, thereby adding on to the already heavy burden on these companies. Also, GAIL, being a GOI controlled company, is not in a position to increase LPG prices due to political considerations (elections round the corner). | |
High capital expenditure plans: GAIL has plans for large-scale capital expenditure in the upstream activities of exploration and production activities. As per the estimates, it has lined up a capex of Rs 1.0 bn in FY04 and Rs 2.3 bn in FY05 for drilling in deepwater exploration blocks. Further, the company has planned to expand its petrochemicals capacity by making an investment of Rs 7.2 bn in two stages. Further, GAIL has lined up capex in increasing its pipeline network as a part of the national gas grid. If revenue growth were to slowdown, higher capex plans is likely to have an impact on the overall profitability. | |
Telecommunications venture: In order to de-risk its revenue model, GAIL has ventured into unrelated businesses such as telecommunications. It currently has 12 customers with VSNL, the largest customer, accounting for 69% of revenues. It further plans to invest Rs 3 bn in phases to add 10,,000 kms to the network as part of its National Gas Grid project, so as to connect the southern and eastern regions of India and create an IP based network. While there are growth opportunities, this is a diversification from its expertise and therefore, raises apprehensions. | |
High contingent liabilities: GAIL has a high component of contingent liabilities and is also a defendant in many legal proceedings. The company is facing claims to the tune of Rs 75.8 bn from excise, sales tax, customs and income tax authorities among others. In case these claims do materialize, the company shall witness a major dent in its financials. | |
| Financial Performance |
 | |||||
| (Rs m) | FY01 | FY02 | FY03 | 9mFY03 | 9mFY04 |
| |||||
| Net sales | 100,587 | 105,729 | 117,676 | 86,934 | 90,260 |
 | |||||
| Other income | 1,420 | 2,096 | 3,188 | 1,940 | 1,680 |
| |||||
| Expenditure | 78,923 | 81,694 | 87,661 | 65,308 | 67,590 |
| |||||
| Operating profit (EBDITA) | 21,664 | 24,035 | 30,015 | 21,626 | 22,670 |
| |||||
| Operating profit margin (%) | 21.5% | 22.7% | 25.5% | 24.9% | 15.4% |
| |||||
| Interest | 1,972 | 2,269 | 1,864 | 1,490 | 1,051 |
| |||||
| Depreciation* | 5,325 | 5,934 | 6,238 | 4,966 | 4,682 |
| |||||
| Profit before tax | 15,787 | 17,928 | 25,101 | 17,110 | 18,617 |
| |||||
| Extraordinary items | (265) | 91 | 82 | - | (20) |
| |||||
| Tax | 4,260 | 6,161 | 8,792 | 6,350 | 6,205 |
| |||||
| Profit after tax/(loss) | 11,262 | 11,858 | 16,391 | 10,760 | 12,392 |
| |||||
| Net profit margin (%) | 11.2% | 11.2% | 13.9% | 12.4% | 3.2% |
| |||||
| Less Adjustments: | |||||
| |||||
| Change in accounting policies | 2,672 | (115) | (1,176) | - | - |
| |||||
| Other Adjustments# | (248) | - | - | - | - |
| |||||
| Adjusted Profit after tax/(loss) | 8,838 | 11,973 | 17,567 | 10,760 | 12,392 |
| |||||
| No. of shares (m) | 845.7 | 845.7 | 845.7 | 845.7 | 845.7 |
| |||||
| Diluted earnings per share (Rs)* | 10.5 | 14.2 | 20.8 | 17.0 | 19.5 |
| |||||
| Shareholding |
| (%) | Pre-Offer | Post-Offer |
| GOI | 67.35 | 57.35 |
| Public | 32.65 | 42.65 |
| Valuations and comments |
|
Since GAIL has a unique business model, comparative valuations are not possible. At the floor price of Rs 185, the stock is trading at a P/E multiple of 9.5x its estimated FY04 earnings and a price to book value of 2.1x FY04E. Overall, we believe that entry barriers are very high and long-term growth potential continues to remain promising. Therefore, positives seem to outweigh risks from the long-term perspective. |