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GAIL: Analyst meet extracts

Mar 21, 2006

In an analyst meet recently, the management of Gas Authority of India (GAIL) shared its views on the natural gas sector, the growth prospects and long-term plans of the company. Here are the key takeaways from the meet.

What is the company’s business?
GAIL is India’s largest gas transmission and distribution company accounting for nearly 90% of the domestic gas volumes. The company operates more than 5,600 kms of cross-country gas pipelines, handling approximately 133 MMSCMD (million metric standard cubic meters per day) of natural gas. The company has integrated into a petrochemicals and LPG (liquefied petroleum gas) major and is one of the largest producers of LPG in the country. It operates 7 LPG plants across the country with a combined capacity of nearly 1.2 MTPA (million tonnes per annum). GAIL also has interests in exploration blocks within and beyond domestic confines, with stake holdings in nearly 12 blocks. The company has also ventured into CNG (compressed natural gas) and is a joint promoter of Mahanagar Gas and Indraprastha Gas in the Mumbai and Delhi circles respectively (besides having stake in other metro-distribution companies in India). It has acquired a stake in Egyptian companies for gas marketing in recent times.

Key takeaways

  1. Demand for gas: Natural gas continues to remain cheaper as compared to naphtha and fuel oil. To put things in perspective, while naphtha and fuel oil costs US$ 12 and US$ 9 per MBTU (million british thermal units) respectively, the cost of natural gas is US$ 7 per MBTU. Considering the fact that natural gas prices have risen sharply in the global markets (and are likely to remain firm), GAIL opined that domestic industrial units are willing to purchase gas upto US$ 6 to US$ 6.5 per MBTU.

  2. Sources of Gas - Domestic: As a dominant player in the gas transmission segment, GAIL’s growth prospects are closely linked to the supply of gas. Higher the volume of gas supply, higher the transmission revenues for the company. To put things in perspective, an incremental 1 m tonne increase in gas supply rakes in Rs 450 m as revenues for the company. Looking forward, though the supply side is likely to be boosted largely by LNG re-gasification capacity augmentation, major domestic supplies from new fields are likely to accrue by FY09 and beyond. While the table below throws some light on the scenario by FY09, by FY12, GAIL expects supply of around 20 to 40 MMSCMD through cross-border pipelines (Myanmar, Iran and Turkmenistan). So, GAIL is likely to benefit from this increased gas supply only in the long-term.

    The supply side will not catch up…
    FY09 (MMSCMD)  
    Demand side 260 to 300
    Supply side 110 to 150
    ONGC 45
    Other domestic fields (current) 20
    Reliance 15 to 25
    Other domestic fields (new) 0 to 10
    New gas technology (coal-bed methane) 5 to 10
    LNG 25 to 40
    Shortfall 150

  3. Gas distribution: Apart from being a pure transmission player, GAIL also has a strong presence in gas distribution as far as PNG (piped natural gas for domestic and corporate use) and CNG (compressed natural gas for automobiles) are concerned. All the gas distribution interest are entered into through a joint venture, which is expected to increase from the current 7 cities to 28 cities in the next two to three years (in the new joint ventures with oil marketing companies, the company intends to have 22.5% stake). Gas distribution is a highly profitable in nature with operating margin ranging 18% to 45%, depending on the revenues mix (CNG and PNG). Following are some of the interest of GAIL on the distribution side and we believe that this is a very exciting aspect of the natural gas sector. With key metros expected to push CNG as an environmentally friendly vehicle, we expect demand to grow at a robust pace in key metros. Also, considering the fact that the government is likely to remove subsidies in the case of LPG, prices are expected to rise sharply. Considering the fact that PNG (piped natural gas) is cheaper by atleast 10% to 25% (depending upon the prospective LPG price increases), more customers are expected to opt for PNG in the long-term. GAIL, with its equity stake, is likely to reap rich dividends.

  4. 9mFY06 performance summary: The first nine-month performance of the company was impacted owing to the shutdown at the Reliance refinery in Jamnagar and a 25-day plant down of its own petrochemical plant. While the gas transmission revenues grew by 11% YoY in 9mFY06, LPG transmission, LPG and polymer sales were marginally lower owing the refinery shutdown. However, the management has opined this has been recovered in the fourth quarter.

  5. Shell-Hazira agreement: The Hazira re-gasification capacity commenced by Shell is currently idle (2.3 MT per annum). GAIL has booked this re-gasification capacity for the next three to four years to source gas through the LNG route and supply to the domestic market. This is likely to enhance revenues of GAIL in the immediate term.

  6. Capex: GAIL has outlined capital expenditure to the tune of Rs 30 bn towards expanding the pipeline network and augmenting the petrochemical capacity from the current levels of 310,000 TPA (tonnes per annum) to 440,000 TPA in the case of polyethylene. In FY06 and FY07, the capex is estimated at Rs 15.2 bn (of which Rs 4.2 bn is towards gas pipeline projects) and Rs 29.7 bn (of which Rs 18.8 bn is towards gas pipeline projects) respectively.

What to expect?
At Rs 285, the stock is trading at a price to earnings multiple of 9.9 times trailing twelve months earnings. Though the current tariff structure is under review for gas transportation, the company expects it to be revenue neutral. As far as the petrochemical business is concerned, currently, the company is the only larger player in India that relies on natural gas as a feedstock (unlike Reliance and Haldia). Though the near-term outlook for petrochemical prices are firm, even if prices soften, the company expects to be competitive in the global market, given its advantage as far the feedstock is concerned. However, once the Panna-Mukta field gains scale, we believe that the company’s margins in the petrochemical business will face pressure.

Taking a long-term view, considering the demand for gas and the company’s strong standing in the sector, GAIL is one of our preferred stocks in the energy sector. Considering the fact that the company has significant interest in the gas distribution and exploration side (likely to be augmented), we are looking at a fairly integrated gas player in the future.

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