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GAIL: Research meet excerpts

Nov 8, 2004

Following are the excerpts from our research meeting with GAIL India, the country’s largest gas distribution and transmission company, which controls over 90% of the natural gas transmission. The focus of the meet was to know the company’s future prospects in the natural gas business on the back of pending important decisions regarding gas pricing, pipeline policy, cross-border pipeline and the new sources of natural gas.

Company background:
GAIL is the country’s largest gas transmission company accounting for over 90% of natural gas business. The company owns and operates over 4,800 kms of natural gas pipeline and also has interests in petrochemicals and LPG (liquefied natural gas) business. GAIL is now eyeing the exploration business having struck gas in Myanmar fields and has initiated a subsidiary in Singapore so as to enable easy foreign investments through the subsidiary route.

Key Impressions:
  • Transmission charges concerns put to rest:  GAIL receives transmission charges for the gas it supplies to its customers. Post Reliance’s offer to sell natural gas to NTPC’s Kawas Gandhar project at US$ 3.97 per MMBTU (million British Thermal Units), it was expected that natural gas transmission pricing would be reduced. However, when spoken to company sources, the issue is still to be discussed and for the time being, a proposal was made from the company to actually increase the transmission charges.

  • Future sources and demand:  As per the current activity in the Krishna Godavari Basin by ONGC and others, there are high expectations of substantial gas find from the fields over the next three to five years. Further, until now, major gas consumers have been skewed towards the Northern and Northwestern region. However, now with industrial activity spreading across the South and Eastern regions, the National Gas Grid (NGG) has become a viable proposition and GAIL plans to expand in these markets as well. On the demand side, there is clear visibility going forward.

  • Evacuation and transmission of new sources:  As for Shell’s Hazira terminal, there is adequate demand in and around Gujarat and therefore, the project is viable. GAIL, with its established infrastructure, has an edge in the region. On the other hand, substantial gas finds in Myanmar and the Myanmar government’s decision to appoint GAIL as the preferred marketing company for the gas has opened the options for GAIL to source the natural gas in the form of LNG or pipeline route or either CNG. Therefore, the project is set and the country is likely to witness additional gas supply soon.

  • On plans to lay pipelines in the KG Basin:  Since the government has allowed Reliance Industries to lay the pipeline to transmit gas from the basin to NTPC’s project, as per the pipeline policy, which states that others can also utilize the pipeline, GAIL shall not duplicate the efforts. It would not be a viable option. However, the Kochi terminal being set up by Petronet LNG opens the gates for the company to cater to the hitherto untapped southern markets.

  • Future projects:  GAIL is now planning to venture into 22 new cities for gas distribution (CNG and PNG). Although this business has high infrastructure costs with a gestation period of 2 to 3 years, the business in the long run is profitable. The company has already joined hands with IOC for the venture in Kanpur and Lucknow and shall soon do the same with other oil marketing companies in other areas. At the same time, negotiations are on for another LNG sourcing pact with Iran. The project, if viable, would result in another LNG gasification terminal at Ennore.

At Rs 211, the stock is trading at a price to earnings multiple of 8x FY05E earnings. We believe the company is likely to witness strong growth in the natural gas business as more and more industrial consumers shift towards natural gas from naphtha. The fact that demand for naphtha has fallen by over 10% during the current fiscal proves the point. Further, with more vehicles plying on CNG and rising LPG prices driving consumers towards PNG, GAIL is likely to witness strong volume growth. Having said that, concerns over huge capex over the next few years and the telecom business remain.

We had recommended the stock in July 2004 at Rs 189. We maintain our BUY view on the stock with a long-term perspective.

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