Gail is likely to benefit from higher availability of natural gas in coming months. Its capex plans and growing businesses make it a good long-term investment
GAIL (INDIA) is the country's largest natural gas company with annual revenue of around Rs 17,000 crore and market capitalisation (m-cap) of around Rs 35,600 crore. The company owns and operates the largest natural gas pipeline network in India and handles over 75% of the total gas transported in the country. Gail is investing heavily to lay more pipelines to widen its reach, and will be a major beneficiary of the likely jump in domestic production of natural gas. Gas production in India is likely to double in the next couple of years, which may boost Gail’s gas transportation business. Investors can take exposure in Gail with a two-year horizon.
BUSINESS:
Currently, Gail operates in all segments of the natural gas value chain — from processing, transporting and marketing, to producing downstream petrochemicals using natural gas as feedstock. With a 6,800-km-long pipeline network, Gail continues to remain the largest natural gas transporter in India. In order to achieve backward integration, the company has invested in 29 exploration blocks and three coal bed methane (CBM) blocks. It recovers LPG from its seven natural gas treating plants and sells to oil marketing companies.
Gail has also invested in companies which cover other aspects of the natural gas business, such as liquefied natural gas (LNG), city gas distribution (CGD) and gas-based power projects. It has set up joint ventures in Russia, Egypt and China to market natural gas. The company has embarked on an ambitious expansion plan to invest nearly Rs 29,000 crore over the next five years to augment its gas pipeline network, exploration & production (E&P) activities, petrochemicals, city gas projects and LNG, among others. The completion of Gail’s capital expenditure (capex) programme, will help double its natural gas transmission capacity, extend retail gas sales to 200 cities, expand its LNG terminals and increase its petrochemicals capacity by 60%.
GROWTH DRIVERS:
The company's gains will accrue incrementally as the availability of natural gas improves in India. Within the next two years, the total domestic natural gas production is likely to double to 160 million cubic metres per day (mcmd) from the current 81 mcmd. The availability of natural gas is likely to further shoot up to 285 mcmd by ’12.
Currently, the central government plans to bring the gas produced by the Panna, Mukta and Tapti consortium to Gail for marketing from April ’08. This will boost the company’s revenues. Similarly, natural gas production from Reliance Industries’ Krishna Godavari (KG) basin oilfields is likely to start by mid-’08. Gail has already entered into a memorandum of understanding (MoU) with Reliance Industries (RIL) for transporting its gas. Moreover, Gail holds a stake in five E&P blocks, which have recently struck gas and are under development.
FINANCIALS:
Despite its robust performance, Gail’s growth has been stunted over the years due to the burden of sharing subsidy. During FY07, the discounts extended to oil marketing companies were equivalent to over 60% of Gail’s reported profit of Rs 2,386.7 crore. The company’s net profit has witnessed a compound annual growth rate (CAGR) of 14.4% over the past 10 years, while sales have posted a CAGR of 10.9%. Gail has consistently paid dividends, which have witnessed a CAGR of 21.4% during the same period. The company’s dividend yield currently works out to around 2.4%.
VALUATIONS:
Gail’s current market price of Rs 421.60 discounts its trailing 12 months earnings by 13.9 times, which appears fair, considering its current business profitability. However, the company is likely to post steady growth in the coming months, thanks to the increasing availability of natural gas and its capex plans.
With commissioning of new pipelines and improvement in gas availability, Gail is likely to earn additional revenues of Rs 1,250 crore annually by FY09 and another Rs 2,750 crore annually from FY11 onwards. This alone will translate into a CAGR of 16.7% in operating profit over the next four years.
Gail’s investments in petrochemicals, CGD and exploration business will add value to its business over the next 2-3 years. Long-term investors with a two-year horizon can accumulate the stock at its current price. Gail’s dividend yield is likely to rise to 4.5% by ’11 at historical cost, provided the company maintains its payout ratio. This is an added incentive for investors.
RISKS:
The company’s future profitability may suffer if its subsidy burden increases disproportionately.
GAIL (INDIA) is the country's largest natural gas company with annual revenue of around Rs 17,000 crore and market capitalisation (m-cap) of around Rs 35,600 crore. The company owns and operates the largest natural gas pipeline network in India and handles over 75% of the total gas transported in the country. Gail is investing heavily to lay more pipelines to widen its reach, and will be a major beneficiary of the likely jump in domestic production of natural gas. Gas production in India is likely to double in the next couple of years, which may boost Gail’s gas transportation business. Investors can take exposure in Gail with a two-year horizon.
BUSINESS:
Currently, Gail operates in all segments of the natural gas value chain — from processing, transporting and marketing, to producing downstream petrochemicals using natural gas as feedstock. With a 6,800-km-long pipeline network, Gail continues to remain the largest natural gas transporter in India. In order to achieve backward integration, the company has invested in 29 exploration blocks and three coal bed methane (CBM) blocks. It recovers LPG from its seven natural gas treating plants and sells to oil marketing companies.
Gail has also invested in companies which cover other aspects of the natural gas business, such as liquefied natural gas (LNG), city gas distribution (CGD) and gas-based power projects. It has set up joint ventures in Russia, Egypt and China to market natural gas. The company has embarked on an ambitious expansion plan to invest nearly Rs 29,000 crore over the next five years to augment its gas pipeline network, exploration & production (E&P) activities, petrochemicals, city gas projects and LNG, among others. The completion of Gail’s capital expenditure (capex) programme, will help double its natural gas transmission capacity, extend retail gas sales to 200 cities, expand its LNG terminals and increase its petrochemicals capacity by 60%.
GROWTH DRIVERS:
The company's gains will accrue incrementally as the availability of natural gas improves in India. Within the next two years, the total domestic natural gas production is likely to double to 160 million cubic metres per day (mcmd) from the current 81 mcmd. The availability of natural gas is likely to further shoot up to 285 mcmd by ’12.
Currently, the central government plans to bring the gas produced by the Panna, Mukta and Tapti consortium to Gail for marketing from April ’08. This will boost the company’s revenues. Similarly, natural gas production from Reliance Industries’ Krishna Godavari (KG) basin oilfields is likely to start by mid-’08. Gail has already entered into a memorandum of understanding (MoU) with Reliance Industries (RIL) for transporting its gas. Moreover, Gail holds a stake in five E&P blocks, which have recently struck gas and are under development.
FINANCIALS:
Despite its robust performance, Gail’s growth has been stunted over the years due to the burden of sharing subsidy. During FY07, the discounts extended to oil marketing companies were equivalent to over 60% of Gail’s reported profit of Rs 2,386.7 crore. The company’s net profit has witnessed a compound annual growth rate (CAGR) of 14.4% over the past 10 years, while sales have posted a CAGR of 10.9%. Gail has consistently paid dividends, which have witnessed a CAGR of 21.4% during the same period. The company’s dividend yield currently works out to around 2.4%.
VALUATIONS:
Gail’s current market price of Rs 421.60 discounts its trailing 12 months earnings by 13.9 times, which appears fair, considering its current business profitability. However, the company is likely to post steady growth in the coming months, thanks to the increasing availability of natural gas and its capex plans.
With commissioning of new pipelines and improvement in gas availability, Gail is likely to earn additional revenues of Rs 1,250 crore annually by FY09 and another Rs 2,750 crore annually from FY11 onwards. This alone will translate into a CAGR of 16.7% in operating profit over the next four years.
Gail’s investments in petrochemicals, CGD and exploration business will add value to its business over the next 2-3 years. Long-term investors with a two-year horizon can accumulate the stock at its current price. Gail’s dividend yield is likely to rise to 4.5% by ’11 at historical cost, provided the company maintains its payout ratio. This is an added incentive for investors.
RISKS:
The company’s future profitability may suffer if its subsidy burden increases disproportionately.
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