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GAIL: Management meet extracts - Views on News from Equitymaster
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GAIL: Management meet extracts
Sep 28, 2007

We recently met the management of GAIL to get a perspective of the various developments taking place within the company and gauge its future prospects. Following are the key extracts of the meeting. Natural gas trading and transmission: GAIL is upgrading 2 pipelines and laying 5 new ones. The segment is expected to grow on the back of volumes from the enhanced pipeline capacity. The company expects the transmission volumes to jump to 120 million cubic meters per day (MMSCMD) with 40 MMSCMD of KG basin gas coming onstream around July 2008.

The company does not expect any significant threat of parallel pipelines coming up. GAIL has a first mover advantage and has already covered the significant pipeline sectors. The company’s transmission tariffs are already quite competitive and the market is regulated with tariffs capped to a 12% return on equity. So private players do not have a strong incentive to lay additional pipelines. They can use GAIL’s network because it builds in a 33% capacity in its pipelines in addition to its own requirements, operates on common carrier principles and is not allowed to discriminate between users.

Petrochemicals: GAIL is upbeat about its petrochemical segment. It has recently added to the capacity of its Pata petrochemicals plant up from 310,000 tonnes per annum (TPA) to 410,000 TPA. It also has plans for complexes in Vizag and/or Kochi as well as a project in Iran. GAIL does not expect a downturn in petrochemical prices, something that has been expected for 4 years now, because of the strong demand for its products in the domestic market.

City gas distribution: GAIL has plans for gas distribution in more than 200 cities. The main benefit is the extension of its bulk transport pipelines up to the city limits. Within the city, GAIL is open to joint ventures with the PSU oil marketing companies (OMCs) or private parties for the last mile connectivity. Although the volumes are lower in city gas distribution compared to bulk transport, margins are higher. It also brings visibility to the company.

Exploration and production: The discovery in the Cambay basin is awaiting DGH approval. Gas from the A3 block in Myanmar will either be brought into India or will be monetised and remitted into India depending on what’s more economically and politically feasible.

Gailtel: GAIL will continue to extend the optical fiber cables network while laying down the new pipelines for bulk transport of natural gas. However, it is not expected to turn out into a significant segment in the future given the competition in the telecom carriers’ space.

Subsidies: The company continues to request the government to lessen its subsidy burden. While the ministry makes positive noises from time to time, it is unlikely that subsidies will go away given the extent of under recoveries by OMCs from their end products. The high cost of crude inputs will continue to be affect upstream and midstream players and the amount of subsidy remains unpredictable.

We shall soon update our research report on the company.

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