Over the past few months a lot of attention has been 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 to 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%.
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The company owns 4,000 Kilometers of pipeline with a capacity of 64 million metric standard cubic meters / day 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 as it is a cleaner fuel compared to other fossil fuels. The shift is apparent in power plants and fertiliser units, which are moving to natural gas as their primary feedstock. Seeing this trend, GAIL to cope in this new scenario has undertaken an aggressive expansion plan.
GAIL is aiming to become an integrated player in the gas value chain for which it will need to integrate vertically both forward and backward. GAIL's forward initiative has been the setting up of a Rs 24 billion petrochemical plant in Pata, Uttar Pradesh. The project went on stream, with a polymer capacity of 300,000 tonne per annum, in FY00.
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 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 expenditure of Rs 12.3 billion.
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, 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 (12.5%) in Petronet LNG. Petronet is JV between Indian Oil (IOC), Oil & Natural Gas Corp (ONGC), Gas Authority (GAIL), and BPCL. The JV has been formed to set up LNG terminals at Dahej (5 m tonnes) and Kochi (2.5 m tonnes). The JV will also form separate companies for setting up LNG transmission 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. For its pipeline business GAIL enjoys significant competitive advantage, as projects are capital intensive and time consuming in nature. Further, its pipeline assets are fully depreciated and it would be difficult for a new entrant to match the low cost structure.
To make it a complete player in the value chain GAIL is planning on participating in exploration & production (E&P) under the New Exploration Licensing Policy (NELP). For this initiative it is planning to form a consortium with Indian and International majors.
To make it a part of the new economy and with more than 4000 Km of pipeline distribution, Gail is planning to leverage on this network for its broadband initiative. The company has already laid optic fibre cable in parts of its pipeline system. The Government is contemplating on deregulating the lucrative long-distance voice and data transmission. GAIL would stand to benefit from the obvious synergies, as it already has a wide distribution network.
With economic growth gas should become the preferred fuel, LPG as domestic fuel and LNG as feedstock for power plants and fertiliser units. India is a power deficit country and with more plants being gas-fired the demand for LNG would more than absorb the gas supply. Hence, demand will continue to outstrip supply and therefore the driver of GAIL's turnover will be its throughput and not demand.
With its various business initiatives and favourable industry scenario, GAIL should be able to capitalise on the opportunity going forward. It is trading close to half its 52 week high at a P/E multiple of 5.3. Does it need a re-look?