GAIL (formerly Gas authority of India) is the pioneer of the natural gas processing and distribution sector in the country. In FY10 it completed 25 years of 'glorious' service to the country. For sure it is a giant entity in its own right. At end FY10 it boasted a gross block of Rs 233 bn (inclusive of capital work-in-progress), recorded gross sales of Rs 254 bn, a profit before tax of Rs 46 bn, a paid up capital of Rs 12.7 bn, reserves and surplus of Rs 155 bn, and a market capitalisation in excess of Rs 500 bn. But it must be added that the reason that it got there, and in double quick time at that, is the very fact that it is a 'navaratna' PSU (public sector undertaking) and hence had all the right connections.
Starting life as a gas pipeline company; it has today evolved as an integrated gas major with global footprints. As the chairman Mr B. C. Tripathi puts it, 'India's gas market is on the threshold of its next phase of accelerated growth across the entire gas value added chain. Supplies are witnessing a significant jump, the interstate gas pipeline grid is fast taking shape, regulatory reforms in city gas and power sectors, and pricing reforms in the fertilizer sector are gathering momentum. Natural gas is emerging as a major driver to spur clean and strong industrial growth'.
The more the merrier is the dictum
GAIL is one of the spate of oil and gas entities coming under the aegis of the Ministry of Petroleum and Natural Gas, which in its wisdom has decided that the more, the merrier. The Petroleum Ministry has 14 PSUs under its wing including GAIL and assorted oil and petroleum companies (and not including their subsidiaries), and one subsidiary (as it calls it) of the Ministry, Mangalore Refineries and Petrochemicals. Then there are another 8 separately classified organisations under its wing, including ONGC Videsh. This listing does not include such offshoots as Petronet LNG, which like GAIL trades in LNG (liquefied natural gas) and was promoted by the mainline oil PSUs and GAIL.
Laid low by executive fiats
The PSU that it is, GAIL is not an easy company to administer. And the Chairman and Managing Director Mr B C Tripathi, his smiling visage peering out of the annual report notwithstanding, must be finding it a very stifling experience. But from his public statements he sounds very pleasant and accommodating. The problem is that every aspect of the company's functioning is governed by overbearing mandarins - and the company has to turn in a profit at each year end, inspite of the pre-ordained parameters. All projects that it conjures up must pass muster with the Ministry overlords. The pricing of its products - both the input and the output - is today governed by the Petroleum and Natural Gas Regulatory Board. This Board is the new overseer. The annual report states that the Board, since coming into being, has notified more than 20 numbers of regulations pertaining to Natural Gas Pipelines and City Gas Distribution, and there are many more regulations at the draft stage. That is only one of the many issues that it faces.
The company has also been targeted by the government to share in the oil subsidy burden even though it deals only in gas. The report states 'that as per government of India directives, in order to make LPG affordable to domestic consumers, your company is sharing the subsidy on account of under recoveries of national Oil Marketing Companies. Your company has made a provision of Rs 13.3 bn on account of subsidy for FY10' the report adds. It is not clear whether GAIL is also subsidising oil under recoveries, or it is only subsidising LPG under recoveries. How the company finally musters up the profit margins in the midst of all these uncertainties, and the bizarre math that is involved in realising these profits, is a thought worth pondering.
How it adds up the top-line
Whatever, the company today buys imported natural gas from Petronet LNG and Hazira LNG, and domestic gas from Hindustan Oil Exploration Company, ONGC, and Reliance Industries etc, for re-circulation to the industrial sector and the household sector. It is implementing a pan India pipeline project to transport the gas across 16 states at a capital cost of Rs 300 bn. In the field of pipeline transmission of Natural Gas, it claims it has a commanding share of around 72% of the entire gas available in India. To get directly to the source, it is also participating in 28 E&P (exploration and production) Blocks and 1 CMB (coal methane bed) block.
It also separately produces LPG, propane, ethylene, HDPE/LLDPE (high density polyethylene/linear low density polyethylene), and methane-propane (C2/C3) gas. It has also invested in the equity of downstream units, including a large petrochemical complex subsidiary, The Brahmaputra Cracker and Polymer Complex, in Assam. This unit when fully operational is going to cost a bundle and may take forever to give a return on equity (ROE) to the parent.
In spite of the many products that it has on its plate, it is still a two product wonder if the stats are anything to go by. The sale of natural gas including regassified LNG accounted for 75% by value of all sales of Rs 240 bn, as detailed in the sales breakup schedule. Sales of downstream polymers (HDPE/LLDPE) brought in another 12.6%. Cumulatively that accounts for a shade under 88% of all rupee sales. Sales of LPG brought in another 7.4%.
The complex accounting
The way the rupee sales are generated however is intricate, and difficult to comprehend to the untrained eye. The company bought Rs 184 bn worth of natural gas, but sold gas worth only Rs 179 bn in the market (different schedules show different sales figures). The unit sale price realisation was however higher than the purchase cost. It purchased the gas at Rs 6.2 per cubic meter, and sold it at Rs 6.5 per cubic meter - a mark up of 4.8%. The expenses incurred in adding value to the gas before it was sold are not known. About Rs 32 bn worth of natural gas that it purchased was consumed internally - probably implying that it was used to make polymers or some such. The perplexing fact here is that the internal consumption cost of this gas comes to a hefty Rs 14.1 per cubic metre! How can this be, and what type of differential pricing is this please? If my imagination is not running wild, then this method of spreading cost can also be referred to as book entry transfer pricing! Furthermore, the quantity of closing stock of Natural gas at year end does not tally with the purchase and consumption figures.
The breakup of the segmental revenue and profits under the business segments is even more flummoxing. It breaks up its business under six segments for this purpose, which includes the sales generated from Natural Gas and LPG under three segments. It generates the bulk of its sales from Natural Gas Trading (Rs 188 bn) with a segmental operating profit of only Rs 3.7 bn, while it generates comparatively miniscule sales of Rs 31.7 bn from Transmission Services sales of Natural Gas, but earns mega profits of Rs 22.4 bn under this head. What type of pricing structure is it that the Petroleum and Natural Gas Regulatory Board has ordained for different revenue streams under natural gas sales? It indulges in relatively minor Transmission Services Sales of LPG gas (Rs 4.5 bn) but earns substantial margins of Rs 2. 8 bn. The margins that it generates under this head too make one wonder. LPG is also sold under a different head which makes it all the more complicated-but let that be.
It generates sales under two other heads - Petrochemicals (probably meaning sales of polymers), and LPG and Liquid Hydrocarbons. The sales of polymers bring in the big bucks too - sales of Rs 29.1 bn and segmental profits of Rs 13.3 bn. Is selling polymers such a profitable exercise? Sales of LPG and Liquid Hydrocarbons brought in another Rs 28.3 bn, along with segmental profits of Rs 6.1 bn. How the latter sales figure has been cobbled together beats one all ends up! In toto a panoply of sales and profit figures which are complex in their accounting.
Dicey business in more ways than one
It is a dicey business in more ways than one if one has a dekko at the notes to the accounts. The disputed claims against the company (Rs 47.6 bn) coupled with sales tax claims and interest thereon alone run into over Rs 97 bn. The liability on account of gas pool money adds up another Rs 25.7 bn. These are astronomical figures and the disputed sums are only getting bigger by the year. It is a giant jigsaw puzzle at work here. It also says something of the system that governs the functioning of the corporate sector that a government owned company is unable to come to grips with the commercial laws of the land.
Then there are the many investments - number wise that is, in the many subsidiaries, associates and joint ventures and others. The company has 3 subsidiaries, 10 Joint ventures, 4 associates, investments in 2 companies classified as others, and an investment in a debt offering for a cumulative book value of Rs 18 bn. The dividend return on this investment came to a neat Rs 2.2 bn.
The future perfect
The bewildering complexity of the system within which the company has to operate in apart, it looks all set to reap the whirlwind in the making. As the annual report adds, India is today the 5th largest energy consumer in the world, and is set to become the 3rd largest consumer by 2020. The share of natural gas in the growing energy basket is set to rise as the country aims to switch to cleaner fuels. This involves focussing on increased consumption of natural gas to meet the energy requirements in the offing. And GAIL has been mandated to usher in the change.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.
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.