India's premier gas transporter is gearing up for bigger things. And it is spending big to fuel those plans. While there are some concerns over gas volumes, Gail is still a good bet in a turbulent market.
Astable business, government parentage, strong balance sheet and low valuations make Gail India a good defensive bet in the current turbulent market conditions. The company's expansion plans will hold it in good stead once concerns over availability of domestic natural gas ease.
BUSINESS The company is India's largest natural gas transporter with 8,700 km of pipelines and capacity of 175 million metric cubic meters per day (MMSCMD). It is no wonder then that Gail has been affected the most by the ongoing stagnancy in domestic natural gas volumes. With Petronet LNG's Dahej terminal working at almost full capacity, further growth in volumes has been a concern weighing on Gail's market valuation.
After the setting up of the Petroleum and Natural Gas Regulatory Board (PNGRB), the company has had to adjust its transportation tariffs to the regulator's norms. The company also has to share a part of the under-recovery burden of the oil marketing companies. Both these things have added to the pressure on the company's valuation due to the uncertainties involved.
Gail transports more than 70% of India's natural gas. It owns and operates India's largest pipeline -- the 2,300 km long HBJ pipeline -- connecting Hazira on the western coast to Delhi in the North. It also produces around 0.42 million tonne of polyethylene and 1.4 million tonne of LPG.
The company also has stakes in 27 petroleum exploration blocks, six of which have reported hydrocarbon discoveries. In September 2011, the company bought a 20% stake in Carrizo's Eagle Ford shale acreage in the US where it will invest $300 million over the next five years.
It is also one of the promoters of 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 DRIVERS A few of Gail's immediate concerns are likely to be resolved soon. The PNGRB norms that assure a fixed rate of return on new pipelines will mean the company's average tariff would steadily go up as it commissions more pipelines.
Since Gail shares the under-recovery only on LPG, there may not be any significant growth in its overall burden, even though the industry's overall under-recoveries for FY12 jump due to a weaker rupee.
The company's gas volumes could see some growth in FY13 after the LNG import terminal at Dabhol is commissioned by mid-2012 and the one at Kochi by end-2012.
Gail is gearing up for an increase in domestic gas supplies in the long term and is working on five major new pipelines and upgrading two existing ones. Last year it disclosed a mega capex plan of 29,000 crore by FY13 to double its natural gas transportation capacity and also double its ethylene capacity. Its 70% subsidiary Brahmaputra Cracker is set to commission its 0.28 million tonne per annum plant by mid-2012.
FINANCIALS Gail posted steady growth in its net profit growth of 14.8% to 2,079 crore in the first half of FY12, while revenues were up a healthy 22.1% at 18,566 crore.
The company lost its debt-free status on a net basis in FY11 as its standalone debt surpassed its cash & bank balance. This was on account of the company's borrowing plans to fund its capex plans.
VALUATIONS:
Gail is currently trading at a priceto-earnings multiple (P/E) of 13 based on standalone profits for last four quarters. Assuming the company is able to maintain its earnings growth in the first half of FY12 in the full year, its consolidated net profit would stand at 4,623 crore, which will discount the current valuation at 10.7 times.
The company shed its debt-free status last year thanks to aggressive investment plans
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