• MARCH 29, 2004

Natural Gas: GAIL or Gujarat Gas???

Natural gas is slowly but steadily proving to be the fuel for the future and this shall prove to be a boon for gas transmission and distribution companies such as GAIL and Gujarat Gas, largely based on the volumes of natural gas consumption. Further, upstream companies such as ONGC and Oil India are also likely to benefit from the deregulation.

Currently, natural gas pricing is regulated by the Ministry of Petroleum and Natural Gas (MOPNG) on the basis of a reference to a basket of international fuels and taxes and royalties. Currently, gas is sold with a range of Rs 2,150/TCM to Rs 2,850/TCM (thousand cubic meters). Recently, a group of ministers recommended a hike of Rs 350/TCM of gas. This is to compensate ONGC and Oil India for the fact that the two public sector companies procure gas from private gas producers at prices ranging between Rs 3,850/TCM to Rs 5,600/TCM, while ONGC's own gas costs around Rs 1,850/TCM.

Industries such as power, steel and fertilizers, which account for nearly 80% of natural gas consumption, were earlier suffering from deficit of natural gas due to lack of domestic production, resulting in production loss or using other sources of energy and feedstock at higher costs. However, with Petronet LNG starting commercial operations from the beginning of the next fiscal and Shell setting up another gas terminal at Hazira, natural gas shall be available to satisfy the consumer needs.

GAIL has recently set the ball rolling with its national gas grid project, which will give the navratna, access to the hitherto relatively untapped southern markets. Further, the country's apex court has clearly indicated its seriousness to establish CNG as the transportation fuel. This gives another opening to GAIL's prospects of expansion and the company is in talks with regional players for setting up its CNG network.

Gujarat Gas, on the other hand, has the advantage of being in a regionally regulated market, whereby not more than one gas player can market natural gas. It is now expanding to Vapi, another industrial belt in the second most industrialized state of the country, Gujarat. Also, the company has entered into long term supply contracts with Cairn Energy for procurement of gas at competitive prices.

  Gujarat Gas GAIL
  FY04 FY04E
OPM 20.1% 28.0%
NPM 12.6% 14.8%
P/E (x) 9.3 9.3
It may be noticed that GAIL operates with a higher margin as compared to Gujarat Gas, which is largely due to the fact that GAIL, being a PSU, procures natural gas from ONGC and OIL at pre-determined subsidized rates compared to Gujarat Gas, which being a private entity (British Gas holding nearly 65% stake), procures natural gas at a relatively higher price from different sources, including GAIL.

At the current prices, the two companies are trading at an identical P/E multiple of 9.3x FY04 earnings. This could be largely attributed to the expectations being built up over British Gas's plans for expansion into LNG (liquefied natural gas) and power sector in India, which could directly benefit Gujarat Gas in the long run. Going forward, we feel that GAIL, with its existing large pipeline network and the national gas grid, shall benefit from growing volumes while, Gujarat Gas has regional scope. On the other hand, GAIL's petrochemicals (which is dependent on natural gas as feedstock) and telecom businesses remain a cause of worry. In case, natural gas prices are deregulated, GAIL and Gujarat Gas stand to benefit manifold. However, GAIL shall suffer as far as its petrochemicals business is concerned since it may not be able to pass on the higher costs to the consumers.

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