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GAILís spin off plans: Our view - Views on News from Equitymaster
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GAILís spin off plans: Our view
Mar 27, 2009

The spinoff of GAIL Indiaís marketing business into a new company was on the cards for quite some time. It has finally gone ahead with the decision. GAIL India will run the transmission, petrochemicals and telecom businesses. A new company, GAIL Gas (GGL) will run the marketing and city gas distribution businesses from the next fiscal year. GGL will be listed on the stock exchanges. Transmission infrastructure, whether in power or natural gas, creates natural monopolies. Hence, regulators ensure that integrated players do not get an unfair advantage by leveraging one activity to cross-subsidise another. Since GAIL, by far, has the largest natural gas transmission infrastructure, the petroleum regulator has been keen on unbundling its gas transmission and gas marketing divisions. In fact, Reliance Industries has also separated these two activities.

What to expect?
Prima facie, the spinoff will help investors analyze the underlying economics of the new GAIL India and GGL and accord different multiples to them. This is likely to result in value unlocking for current investors. Much of the GGLís intrinsic value will rest upon future growth in terms of success in city gas operations in multiple cities. This will be driven by how many city gas licenses GGL is able to bag and the gas supplies it is able to secure for each of them.

However, the company is yet to announce crucial information like the share distribution ratio, i.e. the owner of one existing GAIL share will receive how many shares of GGL. Further clarity is also be needed on how the subsidy burden, that GAIL currently bears prior to the spin off, will be split between the two companies after the spinoff.

At the current price of Rs 242, the stock is trading at a multiple of 7.8 times our estimated FY11 earnings. We shall update this analysis on receipt of further details from the company.

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