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GAIL: Benefits will flow with the gas

Apr 13, 2009

We recently attended the analyst meet held by GAIL. Following are the key extracts from the event. Transmission tariffs: GAIL presently operates under a tariff rate of 12% return on equity, which was set nearly 15 years back. The management doesnít see any downward revision in the tariff. The new tariff can be a ratification of old tariff. In fact, it expects an upward hike in the tariff level to 14%.

Marketing margins on KG gas: Marketing margins work out to about US$ 0.14 to 0.15 per m British thermal unit (mBtu). It is not yet clear as to who will get to market the 40 mscmd of the first tranche of RILís KG basin gas. But around 2/3rd is likely to come to GAIL. RIL will cater to Andhra Pradesh.

GAIL Gas: The management clarified that GAIL Gas will not be listed separately. It will function as a 100% subsidiary, which will handle the trading and city gas distribution business. GAIL has around 8 joint ventures for city gas operations. They will compete with GAIL Gas, as of now. In due course, there will be greater clarity on whether the existing JVs will continue independently or will be absorbed by GAIL Gas. In the meanwhile, various permutations are possible.

Petrochemicals: GAIL has a 19% equity participation in Opal, ONGCís petrochemical project at Dahej. It expects a return of 25% to 30% on the petrochemical business. It provides the much needed margins boost to the GAILís predominantly fixed-returns business. Hence, the management is willing to deal with the cyclical swings inherent to the sector.

Projects: GAIL currently has around 7,000 kms of natural gas pipeline and has 5,000 kms of work in progress. The company currently has a transmission capacity of 150 m standard cubic meters per day (mscmd), which will go up to 200 mscmd by the end of FY10 and 300 mscmd by the end of FY12. As a result, the company expects transmission revenue to go up 3 times.

Capital expenditure: GAIL has planned a capital expenditure of Rs 300 bn in the next 3 years and has already committed Rs 110 bn. While 80% investment will be in its core business of pipelines, 20% of the investment will be in exploration and production, city gas distribution and petrochemicals.

Subsidy: GAIL has received a debit note of Rs 18 bn from the government up to December 2008.

LNG: LNG prices have crashed from US$ 13 per mBtu to US$ 6.5 mBtu. Moreover, long term cargoes are not available, only short cargoes can be procured.

What to expect?
We believe that GAIL is well positioned to benefit from the rapidly emerging natural gas sector in India. As such, we maintain our view on the company.

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