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GAIL- Strategy going forward - Views on News from Equitymaster
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GAIL- Strategy going forward
Sep 20, 2007

In the previous articles, we used the SWOT and five-forces framework to take a snapshot of the overall competitive position of the company as it stands today. In this concluding article, we look at the strategy articulated by the company, which it plans to adopt going forward. Upstream
What? The company plans to continue with its backward integration activities and secure access to additional gas supply in 3 ways:

  1. By participating in both domestic as well as international exploration and production activities,

  2. By investing in infrastructure to support the import of LNG and

  3. By continuing to explore import possibilities through international pipelines.

Why? In order to secure gas and increase profitability. It may be noted that the cash flows of the company are dependent on the capacity utilization of its pipeline (mid-stream) infrastructure. Although expected to improve, the supply scenario is still inadequate to utilize 280 MMSCMD capacities, which company plans to commission by FY13.

Midstream
What? GAIL plans to configure capacity to match supply and demand. The company plans to set up 5,000 kms of pipelines by FY13. The proposed pipelines are Dadri- Bawana-Nangal, Chainsa-Gurgaon-Jhajjar-Hissar, Dabhol-Bangalore-Chennai and Kochi- Kanjirkkod-Mangalore. It intends to maximize the economic value of the available supply by transmitting gas to most important power, fertilizer and industrial facilities.

Why? In order to protect margins and market share. It may be mentioned that while it is difficult to replicate GAIL pipeline network, the sector will be open to other players under the new draft policy for development of gas pipelines network.

Downstream
What? GAIL intends to further integrate forward into profitable, value-added businesses such as the petrochemicals sector and retail marketing of gas, which the company views as a natural extension of its bulk transportation business.

Why? In order to diversify, increase sources of revenue as well as monetize upstream investments.

What? The company intends to diversify into synthetic gas, gas based appliances and renewable energy resources such as hydrogen.

Why? In order to enjoy enhanced returns offered by downstream opportunities.

Conclusion: The upstream strategy is likely to have a negative impact on ROCE as substantial amount of capital needs to be employed and the gestation period is also long. Moreover, eventual success in sourcing hydrocarbons is far from certain.

The mid-stream strategy is likely to have a positive impact on the ROCE. Returns are almost certain as offtake is assured and gestation period between the conception of a pipeline and its commissioning has been around 3 years in the past.

The downstream strategy for petrochemicals is likely to again have a negative impact on the ROCE because of the commodity nature of the business. Its margins are sensitive to capacity addition, which is imminent in the Middle East. However, the strategy for city gas is likely to have a positive impact on ROCE, as margins are higher than bulk transport. We expect gestation period to be short because of the demonstrated project execution abilities of the management in the past.

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