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GAIL India: An overview

May 25, 2004

GAIL India, country's largest gas distribution company, has been trading amidst volatility over the past month and had touched a low of Rs 107 on the now infamous black Monday. The company accounts for nearly 90% of the gas business in India, thereby having a virtual monopoly in the business.

GAIL's gas business contributes nearly 98% to the topline and the company has 7 plants for processing of natural gas for producing LPG. With growing demand for LPG, the company shall benefit in that segment too as an upstream producer of LPG, supplying at import parity prices. The new sources of gas supplies, whether imports or domestic production, shall further boost the company's prospects in the long run. The recent indications of not increasing natural gas prices shall help the company as it uses natural gas as feedstock for LPG and petrochemicals. Also, GAIL's ambitious national gas grid project is underway, which shall provide access to the company to the southeastern regions, which have been hitherto relatively untapped.

GAIL has ventured into upstream activities and has been able to taste success on that front. The company has been able to find gas in Myanmar and is in talks with RasGas of Qatar to import gas along with a stake in Petronet LNG. Here, it has an offtake obligation of 60% of the total volume, apart from being the carrier of gas for IOC and BPCL, which also have an obligation of 30% and 10% respectively.

To highlight on the revenue structure of gas transmission, the company's gas revenue stream can be bifurcated into two segments, viz., HVJ pipeline and Non-HVJ pipeline.

  • HVJ pipeline: The transportation charges along the Hazira-Vijaipur-Jagdishpur pipeline are Rs 1,150/TSCM (thousand standard cubic meters), linked to the calorific value of 8,500 k cal/scm.

  • Non HVJ pipelines: This includes the Krishna Godavari Basin, Cauvery Basin, north and south Gujarat, Mumbai region and the north eastern region pipelines. Most of the customers along these pipelines are taken over from ONGC and are classified as consumer on common grid, consumers partly on grid and partly on dedicated spur line and consumer on dedicated pipelines. While consumers on the common grid are charged proportionately those consumers partly on grid and partly on dedicated spur line are charged proportionate common grid charges and additional dedicated spur line charges.

Further, a 3% escalation on tariff is taken annually for all consumer types to cover escalation in operating costs. With the increasing demand for natural gas and at the same time, supply from Petronet LNG, Shell's Hazira terminal and ONGC, GAIL is likely to witness volume growth. Further, power and fertilizer sectors consume nearly 70% of the natural gas and with large power projects in the pipeline, GAIL shall witness a quantum growth in business.

At Rs 175, the stock is trading at a price to earnings of 7.9x FY04 earnings. The company has a presence in the upstream gas exploration business and is also expanding its base in the petrochemicals segment by picking up stake in Haldia Petrochemicals. Demand for LPG is expected to grow at a CAGR of 8% over the next few years. However, telecom business, which posted a loss in FY04, remains a major concern. Also, being a PSU, government policies shall play a major role in the operations

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