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GAIL: The telecom surprise - Views on News from Equitymaster

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GAIL: The telecom surprise

Sep 4, 2007

In this final article on GAILís various segments, weíll look at the Telecom segment of GAIL. GAILTEL forms only 0.1% of the consolidated topline of GAIL. In terms of bottomline, the segment has made profits for the first time in FY07. When? GAILTEL began commercial operations in June 2001.

What? The segment is based on a high-speed optic-fiber cable (OFC) network and cost around Rs.2.4 billion. Besides leasing bandwidth, GAILTEL also leases infrastructure such as towers and collocation facilities for space and power.

Why? The network serves two purposes. First, it is responsible for meeting the captive communication requirements of GAIL's pipeline. Second, the company decided to monetize the infrastructure, which gave it an inherent advantage in a growing sector like telecom.

Where? It extends to over 13,000 Kms connecting around 200 cities across Rajasthan, Gujarat, Madhya Pradesh, Maharashtra, Uttar Pradesh, Andhra Pradesh, Haryana, Chandigarh, Delhi, Karnataka, Tamilnadu & Kerala.

How? The network is managed centrally on round the clock basis from a state-of-art network management center (NMC) at Noida. The NMC houses high end servers, which allow centralized control over the entire telecom assets in the areas of real time fault management, remote configuration management, network performance management and asset security management.

Whom? There were around 12 customers in 2004, 11 of which were infrastructure customers and one of which was an ISP customer. GAILTEL's largest customer was VSNL, accounting for 69% of the total order value, followed by Data Access, which accounted for 10% of the total order value. GAILTEL's top six customers, which together accounted for 98% of its revenues from the segment, were VSNL, Tata tele, Data Access, Escotel, Hutch and Bharti.

Future plans: GAIL plans to form "Triveni"- a consortium of GAILTEL, POWERTEL (the telecom wing of Powergrid) and RailTel- to leverage the unmatched reach of the public sector giants.

It plans to acquire national long distance (NLD) license shortly for addressing the NLD as well as the enterprise segment.

It also intends to create highly reliable optical fiber cable based city access network in association with its JV partners like IGL/BGL/MGL/CUGL along the city gas pipeline network.

In addition, GAIL plans to venture into Triple Play services (Video on Demand, VOIP, Internet) through strategic tie-ups with value added service providers.

Conclusion: The segment has started to registered positive returns on capital employed for the first time in FY07.

EBIT (88) (11) (18) 9
Assets 2,568 580 502 685
Current Liabilities 323 265 194 210
Capital employed 2,245 315 308 475
ROCE -4% -3% -6% 2%

Given the booming telecom sector and GAILís in-place infrastructure, this segment is expected to do well. No new entrants are expected in the short-to-medium term, although some of the major telecom providers may set up their own OFC networks.

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