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GAIL: A SWOT Analysis - Views on News from Equitymaster
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GAIL: A SWOT Analysis
Sep 17, 2007

In the previous articles, we have looked at GAILís various segments. In the next few articles, weíll take an overall view of the company. We begin with a SWOT analysis of the company. Strengths

  1. Pipeline infrastructure: GAIL owns the largest gas pipeline infrastructure network in India. Transmission assets enjoy strong entry barriers. These assets are also relatively new with intensive operations & maintenance programs.

  2. Exploration and Production (E&P): GAIL has a stake in 29 E&P blocks and 3 CBM blocks. The companyís main aim is to procure more gas supplies for future pipelines.

  3. LNG and Transnational pipelines: By 2009-10, the Indian Gas Market is expected to be 66% bigger and its dependence on imported LNG is expected to increase from 22% to 38% of the total gas trade. GAILís JV company, Petronet LNG already imports 5 MMTPA. Increase in LNG supplies will come from expansion in Dahej terminal, commissioning of Dabhol terminal, supplies from Shellís terminal and setting up of the Petronetís Kochi terminal. GAIL is also working on the Iran-Pakistan-India and Myanmar-India pipelines.

  4. Inter-state gas grid: There were concerns over competitors thwarting GAILís plans for cross-country pipelines by potentially out bidding the company under the proposed regulator. It is no longer valid as the Petroleum ministry has given GAIL the go ahead for the grid. It has also given infrastructure status to pipelines. The company plans to complete 8 new pipelines over 5,000 kms at a cost of Rs 180 bn by FY13, thereby increasing its transmission capacity to 280 MMSCMD, up from 130 MMSCMD presently.

  5. City gas: GAILís city gas distribution can leverage RILís network and GAILís inter-state gas grid. City gas projects will get a 3-5 years marketing exclusivity under the Petroleum and Natural Gas Regulatory Board.

  6. Petrochemicals complex: Itís polyethylene and polymer capacities are slated to increase. Ethylene capacity will go up to 4,10,000 TPA from 3,10,000 TPA. Polymer capacity will go up after a new downstream unit is set up.

  7. Proven Project management track record: The company has completed its pipeline projects well before schedule in the past.

Weaknesses

  1. Government company: Corporate actions such as buyback of shares or becoming a takeover target ensure that a company in the private sector cannot remain perpetually undervalued and value of the company gets reflected in the scrip sooner or later. Buybacks arenít high on the agenda of the management of a government company. There is also no scope for corporate acquirers to take the company over if it remains undervalued. Hence, economic strength might remain insufficiently reflected in the stock.

Opportunities

  1. Demand outlook: World over, the share of natural gas in the primary energy basket is 24%. In India, it is only 8%. However, it is expected to increase up to 14% by FY12 and 20% by FY25. The current consumption of about 100 million standard cubic meters per day (MMSCMD) is slated to reach 283 MMSCMD by FY12. The power sector, which consumes 42% of the gas currently, expects to see a gas-based capacity addition of around 33,655 MW in the next 10 years, which translates to a requirement of 100-120 MMSCMD. There will also be replacement demand of liquid fuel (Naphtha and fuel oil) due to their higher and volatile prices as well as substitution for solid fuels (Coal) on account of environmental issues. The fertilizer sector consumes about 31% of the natural gas currently, which is likely to increase due to the cost effectiveness of gas vis-ŗ-vis other feedstock. City gas sector will witness a manifold jump due to the governmentís bent towards clean fuels.

  2. Agreement with RIL: The company has signed an MoU with RIL to transport its KG basin gas. RIL will also cooperate with GAIL for exploration and production as well as on coal bed methane projects.

Threats

  1. Supply outlook:The concerns over a supply shortfall remains although there have been some encouraging developments of late. Current domestic supply comes from ONGC. Future domestic supplies are chiefly hinged on the KG basis gas, expected to come onstream by July 2008. RIL has also reported success in its Cauvery basin operations and the Myanmar gas fields in which GAIL and OVL have stakes are bearing results. However, the volume of the Cauvery basin gas hasnít been officially determined yet and the Myanmar government tends to favor Chinese companies at the time of sale of gas.

  2. Subsidy: Subsidies on LPG and Kerosene have been the bugbear for GAIL in the past. However, GAIL is expected to be kept out of the subsidy net as per the recommendations of the Rangarajan Committee Report. Impact of sharing under-recoveries

    Impact of sharing under-recoveries
    Particulars FY04 FY05 FY06
    Subsidy (Rs m) 4,280 11,370 10,640
    Impact on GAIL's revenue 4% 8% 7%
    Impact on GAIL's EBIT 13% 28% 25%

  3. Prices: The government of India fixes the tariffs for major pipelines. While the interstate gas pipelines i.e. HVJ and DVPL are regulated, the transmission tariffs of the regional gas pipelines and the LPG pipelines are not regulated. The HVJ and DVPL tariffs have been referred to the Tariff Commission. Petrochemical and LPG pricing depend on the global demand and supply.

  4. Unbundling: The transmission and marketing activities can be unbundled by the Petroleum and Natural gas regulatory board. It might mandate 33% of excess capacity of common carriers to be used for third party use. Currently, the company is allowed to earn trading margins on 17% of the total gas that it sells. If unbundled, GAIL would require a reasonable and assured rate of returns from its transmission business and a reasonable margin on trading of natural gas for the trading entity for the sustainability of each business.

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