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GAIL- A look at the numbers-I - Views on News from Equitymaster

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GAIL- A look at the numbers-I
Sep 7, 2007

In the previous articles, we have looked at the dynamics of GAILís various segments. In the next few articles, we will track the main performance metrics for each segment- beginning with natural gas transmission and trading.

Natural gas transmission and trading
Particulars FY04 FY05 FY06 FY07
ROCE (post tax) 26% 33% 42% 30%
Revenue (Rs m) 75,098 90,540 116,316 142,353
growth 21% 28% 22%
EBIT margin 18% 16% 15% 12%

Note: FY07 numbers, which show sudden a dip, should be kept aside while analyzing the segmentís performance, as they were affected by an extraordinary event-the floods in Hazira. GAILís main pipeline, the Hazira-Vijaipur-Jagdishpur (HVJ) system, was affected for a month due to the floods.

What? The returns on capital employed from the segment have increased dramatically from 26% in FY04 to 42% in FY06.

Why? The returns on capital have increased because revenues have grown at a rapid pace, more than offsetting the gradual decline in margins from 18% to 15%. The rapid growth in revenues is due to the combined effect of an increase in realisations from Rs 3.42 in FY02 per cubic meter to Rs 4.53 in FY06 and the simultaneous increase in volumes. The combination of volume and realisation growth is possible because of the acute demand-supply mismatch in the domestic natural gas market.

Particulars FY02 FY03 FY04 FY05 FY06 FY07
How much
Volume transmitted (MMSCMD) 62 63 63 72 79 77
growth 3% -1% 14% 10% -2%
Capacity utilization of major pipelines* 99% 99% 96% 89% 88% 87%
At what rate
Price per cubic meter of gas (Rs) 3.42 3.40 3.55 3.89 4.53 4.97
growth -1% 4% 10% 17% 10%
* Up to FY04, only HVJ pipeline. FY05 onwards, also includes GREP & DVPL

How? The increased volume was achieved by laying down additional pipelines, thereby expanding the network. The 14% volume growth in FY05 was achieved through the commissioning of pipelines with a total capacity of 28 MMSCMD in FY04. In addition, the company achieved 100% increase in volumes of Regasified LNG in FY06 due to the commencement of supply of the 2nd tranche of 2.5 million tonnes per annum of LNG from Qatar to Petronet LNG. The increased capacity is also reflected in the declining capacity utilization rates, which should have gone up given that more gas was transmitted, and not less.

Construction of pipelines

Pipeline project Commission LengthKm Capacity MSCMD Diameter(inches)
Lanco FY02 200 1.12 18
Jhanore Gandhar FY02 37 2.00 12
Kakinada BSES FY02 8 1.00 18
HVJ upgradation (Dahej to Vijaipur) FY04 610 23.90 42
Kalol Ramol FY04 44 0.80 12
Agra Ferozabad FY04 35 1.20 10
Chainsa Maruti (Gurgaon) FY04 60 2.25 16
Thulendi-Phulpur (HVJ III) FY07 139 2.80 18
Kelaras Malanpur FY07 95 2.00 12/6/4
Vijaipur Kota FY07 192 3.47 18/16/8
Ibrahimpur Dholpur FY07 30 1.50 NA
Jagoti Dewas Pitampur FY07 181 3.00 16/12/4
Dahej Hazira Uran (interstate gas grid) FY07 475 12.00 30/24/18

What next? FY07 has witnessed a large addition to pipelines. As a result, volumes will continue to grow, thereby increasing the topline. However, it remains to be seen whether the same can be transformed into an increase in return on capital employed. In all probability, it will continue to remain in the high 30s to low 40s range.

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