Amongst the most neglected stocks on the market, arguably, is Gas Authority of India Ltd. (GAIL). Despite the gas transmission & distribution major reporting a compounded growth (CAGR) of 12.7% in bottomline over the past five years, the stock continues to languish in a valuation range of 3x - 5x. But then most PSU stocks trade in that range.
GAIL's claim to fame is the Hazira-Bijaipur-Jagdishpur (HBJ) pipeline, which was commissioned in 1988. The cross-country pipeline traverses a distance of 1,700 kms and with extensions measures up to 2,300 kms running from Hazira on the West coast to Delhi in the North terminating finally in Jagdishpur, U.P. The company earns a fixed rate for transporting gas along the HBJ. Originally, the pipeline was designed to handle 18.2 m metric standard cubic meters per day (mmscmd) of gas, which was upgraded to 33.4 mmscmd by augmenting pressure of gas in the pipeline. This was done due to the increased availability and higher demand for the natural resource. The company has envisaged a capital expenditure of Rs 105 bn over the next three - four years to augment capacity of the HBJ pipeline to 60 mmscmd. The doubling in capacity is likely to be completed by 2003. It will further extend this pipeline to Haryana and Punjab.
GAIL is to be paid a fixed rate of Rs 1,150/tscm. The charges are linked to a calorific value of 8,500 kcal/tscm (Kilo calories/thousand scm) and will be adjusted accordingly. Further, the company is to be paid an additional 1% of the transmission charges for every 10% increase in the consumer price index (CPI). This additional charge will be borne by the gas pool account (GPA) and not by the consumer. Simply put, more gas the company pumps higher is the turnover.
For the non-HBJ pipelines the rates are based on independent contracts. The average rate for non-HBJ pipelines is Rs 195/tscm with an escalation provision. Post construction of HBJ, the Government transferred few of the regional pipelines owned and operated by Oil & Natural Gas (ONGC) to GAIL. The regional pipelines are primarily located in the West, South & North-East regions of the country. Also, the company offers operation & maintenance of pipelines owned by it's customers.
As part of the company's LPG foray, GAIL recently commissioned the world's longest and India's first fully dedicated LPG pipeline, which traverses a distance of 1,269 kms from Jamnagar, Gujarat to Loni, U.P. The pipeline has a capacity of 1.7 m metric tonne per annum (MMTPA), which will stand augmented to 2.5 MMTPA in phase-II. The project cost is estimated at Rs 12.5 bn. The company seems to be strong on execution of large projects. Both the HBJ and the LPG pipeline were commissioned before time and within the budgeted costs.
The company is also planning another 600 km LPG pipeline in the South from Vizag to Secunderabad at an estimated outlay of Rs 4.9 bn. The pipeline will help create a link between the supply source and demand centers in the interiors of Andhra Pradesh. Vizag is a port city with hydrocarbon importing facilities. Also, the city houses HPCL's 7.5 MMTPA refinery. GAIL has formed separate joint ventures with British Gas and BPCL for retailing piped gas and CNG in Mumbai and Delhi.
The company also seems to have decided to be present along the entire gas value chain. This will facilitate in reducing the cyclicality in earnings and also bring down the supply risk. Consequently, the company has ventured into gas exploration and production (E&P). Under NELP-II, the company, in association with other oil PSUs, was awarded 6 blocks. This takes the total tally of blocks to 8. Gail will also participate in the international bidding for coal bed methane (CBM) blocks in West Bengal.
However, sales growth of the company continues to be dependent on gas availability. Therefore, GAIL does face a supply risk. The company procures a large percentage of its gas from ONGC, which exposes it to a failure in delivery. The market, it seems, believes that the fun will start only once the planned LNG terminals are commissioned. LNG imports could help in mitigating supply risk. Besides that, as per reports, the company is witnessing a drying up of its Gandhar gas fields. The company, itself, has a gas processing plant at Gandhar for extracting LPG. Although, GAIL will favour supply to its plant, in the medium term constraints in availability will arise. Further, like ONGC, the scrip faces poor liquidity, which could keep institutional buyers at bay (daily volume on most days is less than 10,000 shares). That said, on redundancy of gas availability constraints, GAIL could be a good play on the gas transmission business.
GAIL (India) Ltd has announced results for the quarter ended June 2016. The company has reported 14.6 % year on year (YoY) decline in sales, while bottom-line grew 244% YoY. Here is a brief summary of the results.
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