03 July 2012

GAIL (India): Buy: Business Line




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Investors with a long-term perspective can consider buying the stock of GAIL (India), the country’s largest gas transmission company. Notwithstanding its current troubles due to lower transmission volumes, GAIL’s long-term prospects look good.
The company, which is expanding its pipeline network, should benefit from an expected rise in gas volumes over the next two to four years.
After its poor run on the bourses since the last year, the GAIL stock trades at attractive valuation levels. At its current price of Rs 351, the stock discounts its trailing 12-month earnings by 10 times. This is lower than the levels it has traded at in the past (around 15 times price-to-earnings). Also, with downstream regulator, PNGRB, refusing to regulate marketing margins of gas companies, this overhang on the GAIL stock seems to have receded.

VOLUME WOES

GAIL’s mainstay businesses — gas transmission and trading — have been adversely impacted by the sharp dip in domestic production from the KG-D6 fields of Reliance Industries.
Despite imported gas filling in some of the gap, GAIL’s transmission volumes dipped to around 116 mmscmd in the recent March quarter, compared with 120 mmscmd a year ago. Gas trading volumes also declined marginally.
This, along with a 55 per cent rise in subsidy burden and retrospective effect for tariff reduction in some networks, contributed to GAIL’s March quarter profits dropping 38 per cent. For the full year too, the company’s gas transmission and trading volumes stagnated.

AGGRESSIVE EXPANSION

At the same time, it continued expanding its transmission network widening its reach to high-potential regions such as South India. GAIL aims to increase its pipeline network from around 9,000 km currently to more than 14,000 km by 2015, with a corresponding increase in gas transmission capacity from 180 mmscmd to 300 mmscmd.
The company plans to spend around Rs 18,000 crore over the next three years to expand across segments such as pipelines, petrochemicals, and exploration and production.
Concerns that gas shortage will result in underutilisation of the expanded capacities and drag down GAIL’s profitability has impacted the stock’s performance. These concerns seem justified in the near-term, with domestic output continuing to decline and Petronet LNG, the country’s main gas importer, operating at full capacity.

LONG-TERM PROSPECTS

But over the long-term, gas supplies, especially imported liquefied natural gas (LNG), should increase significantly. Existing LNG terminals are being expanded and new terminals are being set up.
Petronet's Dahej plant is being expanded from 10 million tonnes per annum (mtpa) to 15 mtpa. The first phase (12.5 mtpa) is expected to be completed by October 2013, and full expansion is scheduled for end-2015.
Petronet’s new terminal at Kochi (5mtpa capacity) should be commissioned by the end of this calendar, with full capacity utilisation expected by end-2013. The 5mtpa Dabhol LNG plant is also expected to be re-opened by the calendar-end, and will operate at 30-40 per cent utilisation until the breakwater facility is ready in 2014.
Shell, which runs the Hazira LNG plant, is expanding capacity at the terminal from 3.6 mtpa to 5 mtpa. Besides, Petronet and Indian Oil plan to set up new LNG terminals on the East Coast. Domestic gas supplies may also increase from 2014 onwards. These new gas supply sources should aid GAIL’s network capacity utilisation in the years ahead.
With demand for gas running far ahead of supply and the market dynamics expected to remain so in the coming years, GAIL should have little trouble finding a market for its wares. In the near-term, GAIL plans to increase the number of spot LNG cargoes in FY13 to 30 from 16 in FY-12. But this will require the Dabhol plant to go into operation along expected timelines.
Besides, GAIL has tied up with US-based Cheniere Energy to source 3.5 million tonnes of LNG for 20 years commencing 2017. It has also invested in shale gas assets in the US. The company is also exploring LNG import from various global sources to obtain supplies at competitive rates.

FINANCIAL STRENGTH

GAIL’s strong financial position provides it muscle to withstand near-term pressure on profits. Its low leverage (debt-to-equity of 0.25) gives it sufficient room for funding expansion plans.

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