Huge expansion ahead, pipeline network to nearly double in next
3-4 years
During the management meet, GAIL has indicated that the company is very bullish on
the growth of natural gas market in India, and to capture the full benefit, GAIL is
continuing the huge capex plan planned earlier. The company is in the process of
expanding the gas pipeline network from 7000 km currently to 12500 km in next 3-4
years at a capex of around Rs 200 bn. As far as financing is concerned, the company
has already tied up for Rs 120 bn and we don’t expect any difficulty in financing the rest
considering comfortable debt/equity ration and huge investments in ONGC and other
listed companies.
Three of the major pipelines are being completed in phase 1, which will be ending in
2010. In addition, GAIL has planned 3 more pipelines in phase 2, which will be completed by
2012.
Post the expansion total transmission capacity will increase from 150 mmscmd to 300
mmscmd, which will be sufficient to transport all the available gas which includes RIL
gas as well as gas expected from new LNG capacities. Combined with revenue from
petrochemicals, the company has ambitious plan to increase the topline to Rs 50,000-
Rs 60,000 crore by the end of 11th five year plan from current levels of around Rs
23,000 crore.
Sufficient spare capacity available, expect at least 2/3rd of RIL gas
to flow through GAIL network
Management also clarified the market’s doubts regarding lack of spare capacity in HBJ
pipeline, and clarified that sufficient spare capacity is available and the company expects
at least 2/3rd of KG D6 gas to flow through its network. In addition, the company is also
mapping the progress of laying pipelines with incremental gas supply coming in to
ensure that whenever incremental gas supply comes in, the company is ready with the
gas transmission infrastructure to transport it to end customers. GAIL also indicated
that there is sufficient spare capacity for the first 40 mmscmd coming out from RIL , and stated that HBJ and DVPL pipelines together have 15 mmscmd spare capacity,
which will be enhanced by another 10 mmscmd by end of FY10. With 8 mmscmd
expected to flow through GAIL’s AP pipelines and another 8 mmscmd through DUPL
pipeline in Maharashtra, GAIL aims to transmit at least 30 mmscmd of KG gas once
production ramps up to 40 mmscmd.
Tariff charges for existing pipelines expected to remain at current
levels
GAIL management is confident on the issue of regulatory risk to pipeline tariffs, and
stated that they see no reduction in tariffs of the core HBJ/DVPL network following
introduction of regulation on the ground that these were decided in the past by the
government itself. This is in-line with our estimate of flat transmission tariffs gong forward.
Company focusing on increasing petrochemical capacity
In addition to gas transmission, another segment on which the company is betting big
is petrochemical segment, which contributes nearly 50% to the bottom line. Currently
GAIL has a total petrochemical capacity of 440000 MT in Pata, which will increase to
500000 MT with the commissioning of 6th furnace. The company is looking to double
the
Capacity of Pata plant in next 4-5 years. Also, the company ahs plans to set up one
petrochemical plant outside India, which according to our view will take a long time to
materialize.
CGD and E&P the next growth driver
Going forward, Gail is also focusing on city gas distribution front. The company already
operates CGD networks in several key cities via nine JVs, and plans to
expand this further to more cities. E&P is another area where GAIL is seeking
diversification and is actively bidding for NELP blocks. Currently the company has stake
in 30 blocks, and in future if there is any success in exploration efforts, we expect
significant re-rating of the stock.
No plans to list Gail gas
GAIL has spun off gas marketing business into a new company, which was on the
expected lines as the company was already keeping separate books for both the
businesses. GAIL will focus only on transmission and petrochemical business, and the
new company GAIL Gas (GGL) will run the marketing and city gas distribution
businesses from the next fiscal year. GGL will take over GAIL India’s marketing activities
like the city gas projects. The new entity will also distribute and market CNG for vehicles,
piped natural gas for domestic or industrial use and and auto LPG both in India as well
as abroad. It also plans to set up retail CNG and LNG outlets across the country
We do not see any impact on financials of the company as it is simply an accounting
exercise, and moreover the company has denied any plans to list the company on the
bourses. We see this move as purely a move to meet the policy guidelines as according
to the policy guidelines issued by the Petroleum and Natural Gas Regulatory Board,
GAIL had to split its gas transportation business from the marketing and the trading
business. The policy was drawn to prevent unfair competition that resulted from the
ability of integrated companies like GAIL to cross-subsidise its activities.
Valuations
After the recent run up, the stock is trading at 12.5x and 11x FY09E and FY10E earnings
respectively. Although we are bullish over the long term prospects of the company keeping
in view the huge upside in transmission volumes, over the near term in next 1-2 years,
we expect growth to remain muted mainly on account of poor performance of
petrochemical and LPG business. Petrochemical and LPG business, which currently
contributes around 50% to its profits are still in the downturn, and expected to remain
under pressure till global situation improves. Going forward, from FY08-FY11, we expect
earnings of the company to grow at a muted CAGR of 6.6% in spite of assuming 15.4%
CAGR in gas transmission volumes from 85 mmscmd in FY08 to 130 mmscmd in FY11.
In view of muted growth expected in next 2 years, s. Keeping in mind the decent gains posted by the stock
in the recent market rally. ------L.KANNAN
