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GAIL: Promising prospects ahead

Jun 11, 2003

Gail, one of India's navratnas, has been on a rise on the bourses. The stock has gained about 28% in the last one year. Recently it was included in NSE Nifty index and also the MSCI index. Lets take a look at some of the key reasons regarding the performance of the company. Gail is known primarily as a natural gas transmitter and marketer, with a monopoly of about 90% in the transmission business. Currently it transmits about 21-bn cubic meter (BCM) of natural gas through its pipelines spread across the country (4500 kms of gas pipeline spread across 9 states). Demand potential of natural gas in the country is almost double as compared to supply. Gail's growth so far has been hampered by the supply constraints. However, the supply of natural gas is expected to increase considering the recent discoveries made by Reliance, ONGC, Niko and others and also increased thrust of the government towards the exploration business. This increases growth prospects of the company going forward.

Gail is currently undergoing a detailed feasibility study to double the capacity of its HBJ pipeline (currently about 12 BCM). Also it has plans to expand its network further. It expects to receive about 7.5 mtpa of LNG from Qatar gas fields through its joint venture with Petronet LNG starting from the end of FY04. This will further supplement the supply side. Also considering that the government is focusing towards more efficient fuels like gas as compared to its substitutes like naphtha and coal, there may be a shift towards this fuel in future (see Natural Gas: Bright future ahead).

The company has presence in petrochemicals segment also. It started its natural gas based petrochemicals complex in FY00 with a capacity of about 2.6 lac tpa for producing polymers like LLDPE and HDPE. The company gets benefits as far as its feedstock is considered. With the current upturn in petrochemicals segment, the company may get further benefit with respect to the increasing prices and demand. However, if the natural gas pricing deregulation happens, it may hamper the net profits from this segment.

Gail is a leading producer of LPG with about 1.1-m tpa capacity. With the increasing demand for LPG usage in the country and as people are shifting from kerosene to LPG, demand is expected to increase further. This increases the potential in this segment. However, Gail has entered into unrelated areas like telecom. Also, the company has huge plans of capex around Rs 200 bn in the next few years.

Gail's future prospects looks bright going forward as gas supply increases. Only concern is the deregulation in the natural gas sector and its unrelated businesses like telecom.

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