Over the past few months a lot of attention is being showered on the bigwigs of the oil & gas sector. This is largely due to the expected deregulation and disinvestment in the industry. However, is the market guilty of step motherly treatment of its truly prodigious child, Gas Authority (GAIL)?
GAIL is the largest gas transmission and marketing company in the country. It was set up as a wholly owned company of the Government of India (GOI) in 1984. The Government stake over the years has been reduced to 67%.
The company owns 4,000 Km of pipeline and has 95% market share in the Natural Gas business. The activities include gas marketing & distribution through trunk and regional systems, retailing of Natural Gas and gas processing for the production of LPG, liquid hydrocarbons and petrochemicals.
Internationally, there has been a shift towards gas as a source of energy, this is largely due to environmental reasons. The shift is apparent in gas-based power plants and fertiliser units. Seeing this trend, GAIL to cope in the new scenario is undertaking aggressive expansion.
With economic growth one should see greater use of LPG as a domestic fuel as compared to kerosene. GAIL to meet the expected demand has set up a LPG plant in its petrochemical complex at Aurally, Uttar Pradesh and a second at Gandhar, Gujarat. It has received approval from the GOI to set up the first LPG distribution pipeline from Kandla, Gujarat to Loni near Delhi. The pipeline will be 1,264 Km long involving a capital expense of Rs 12.3 bn.
GAIL has already formed a couple of joint ventures (JVs) for retailing of LPG. Mahanagar Gas Ltd. is a JV with British Gas to supply gas to domestic, commercial and industrial users and CNG to the transport sector in Mumbai. Indraprastha Gas is JV with Bharat Petroleum (BPCL) for supplying gas to domestic and commercial users in Delhi.
For Natural Gas, GAIL has taken promoter stake (10%) in Petronet LNG. Petronet is JV between IOC, ONGC, GAIL, BPCL and NTPC. The JV has been formed to set up LNG terminals at Dahej and Kochi. The JV will also form separate companies for LNG distribution pipelines across India and has a number of such initiatives on the drawing board. With a number of companies planning to set up LNG terminals they will leverage on the assets created by GAIL for distribution. The capital cost for a new distribution pipeline should prove to be a significant entry barrier.
GAIL is also aiming to become an integrated player in the gas value chain for which it will need to integrate vertically. It is planning on participating in exploration & production (E&P) under the New Exploration Licensing Policy (NELP).
With all such initiatives, GAIL threatens to become a leader in the gas sector. It is trading at half its 52 week high and a P/E multiple of 5.3. Does it deserve this treatment?