Gail: Blazing A Trail

The dip in market sentiment has opened a window of opportunity for long-term investors to participate in Gail’s growth story

THE fall in Gas Authority of India’s (Gail) valuations in the first month of 2011 makes it once again attractive for fresh investments. The company is going to be the primary beneficiary of increasing availability of natural gas — a cheaper and better alternative to liquid fuels — in India. With a strong balance sheet capable to fund its aggressive growth plans, Gail can double its size within the next three years. Long-term investors should buy on every dip.

BUSINESS
Gail is India’s largest natural gas transporter with 7,200 km of pipelines and capacity of 155 million cubic metre per day (mmscmd). It also produces around 1.4 million tonne (mt) of LPG and 0.42 mt of polyethylene.
Apart from transporting natural gas, the company is also trading in it that enables it to earn both transport and marketing margins. Gail connects all major demand and supply centres of natural gas in western and northern India and is setting up pipeline network in the southern and eastern parts of India, besides expanding existing pipelines in the north.
The company is also working actively to expand its presence through entire value chain of natural gas. It has picked up stakes in 27 petroleum exploration blocks, of which hydrocarbon discoveries have been made in six blocks.
Gail owns promoter’s stake in natural gas importer Petronet LNG and seven city gas distribution companies, including Indraprastha Gas. It plans to enter city gas distribution (CGD) business in around 50 cities within the next three years.

GROWTH PROSPECTS
In view of rising crude oil prices, natural gas is fast gaining acceptance as the preferred fuel for industrial, automotive and domestic use. Today, usage of natural gas is constrained in India only by its limited availability. However, the scene is set to change in the next few years as various new gas fields are starting production and imports are also rising. Industry analysts estimate the domestic availability of natural gas to grow at a cumulative annualised growth rate (CAGR) of 17% from around 86 mmscmd in FY09 to 215 mmscmd in FY15.
Petroleum and Natural Gas Regulatory Board (PNGRB) has recently approved tariffs for Gail’s existing pipelines, which are distance-based and higher for new ones. This means new pipelines will be able to generate higher revenues from same volumes.
The company has planned an investment of 29,000 crore in three years till FY13, which is more than its entire gross block at the end of FY10. These aggressive expansion plans will double its gas carrying capacity to 300 mmscmd by FY14 in phases. Its polyethylene capacity, which was recently raised to 0.45 mt, will also be doubled to 0.9 mt by FY14. Its 70% subsidiary Brahmaputra Cracker is also expected to commission its 0.28 mt polymer plant by the end FY12.

FINANCIALS
The company’s lower than expected December 2010 quarter results, which caused the recent correction in its share price, were mainly due to a 3-week-long shutdown of its petrochemical plant for debottlenecking. Subsidy burden remains a key uncertainty for the company’s financial performance. However, its impact has come down from nearly 9% of revenues in FY07 to 5.1% at present.
The company enjoyed a debtfree status till recently, but needs to raise around 15,500 crore over the next couple of years to finance its expansion plans.

VALUATION
Gail is currently trading at a priceto-earnings multiple of 15.8 considering its profits for the past 12 months. This is lower compared to its smaller peers, such as Indraprastha Gas and Gujarat Gas. Nearly 15% of the company’s market value is represented by the value of its investments in other listed companies such as ONGC, Petronet LNG etc.