Background & Business

The Gas Authority of India Ltd. (GAIL), one of India's leading Public Sector Enterprises, is the largest gas transmission and marketing company in the Country. The various activities of the Company range from Gas marketing and distribution through trunk and regional systems, to retailing of Natural Gas to Gas processing for production and marketing of LPG, liquid hydrocarbons and Petrochemicals. GAIL owns and operates over 4000 km of pipeline and has about 95% market share in the Natural Gas business in India. Also, more than half of the total Urea production in India is Gas-based out of which GAIL contributes more than 90%, thus making a significant contribution to India's agriculture sector also. Further, GAIL has ventured into telecommunications business with Gailtel having a reach of 8,000 kms, providing commercial bandwidth to customers.

Investment Positives

Monopoly in LNG transmission

GAIL currently accounts for around 95% of the market share in case of natural gas transmission, which can be largely attributed to its vast geographical presence across the country. It has presence in major industrial areas covering around 400 consumers of natural gas. There are high entry barriers in the business as it requires large-scale investment and requires high lead-time for the assets to generate adequate return on investments.

LNG – Fuel of the future

The per capita consumption of energy consumption is just 0.30 tonnes of oil equivalent as against the world’s average of 1.50 tonnes. Natural gas accounts for 8% of country’s total energy consumption. The consumption of natural gas is likely to increases at faster rate as compared to other energy options like coal, oil, gas, hydel and nuclear. Hence, there lies an immense opportunity in the natural gas business. The consumption pattern indicates that the demand has been increasing and the share of natural gas is likely to rise in the future. GAIL will benefit immensely as it enjoys a near monopoly status in gas transmission business.

Retail foray

GAIL has reached its end consumers by entering into reatiling of natural gas in various cities by way of subsidiaries. As of now has three different subsidiary companies – Indraprastha Gas, Mahanagar Gas, Mumbai and Bhagyanagar Gas, Andhra Pradesh. It has plans to spread this environment friendly fuel to 22 cities across the country. The company has plans to cover 50% of the cities in another three years.

Upturn in its petrochemical business

Apart from natural gas business, GAIL is also into petrochemical business. It has largest gas based petrochemicals complex with an installed capacity of 260,000 TPA of polythelene. The company is planning to take up 12-14% stake in Haldia Petrochemicals by buying part of Tata’s stake. GAIL is also looking at acquiring a Turkish company, which is involved in petrochemical business. The company will stand to benefit as the petrochemical cycle is in the uptrend with prices of polymers showing firm trend.

Risk & Concerns

Regulation over prices

As per the Pricing order issued by the MOPNG, GAIL gets a fixed transmission charge of Rs 1,150 per MSCM of gas. Further, it receives an additional 1% on every 10% increase in the consumer price index, which is paid through the Gas Pool Account, in which GAIL has to contribute Rs 250 cr annually in quarterly installments with a lag of one quarter. If the government decides to continue it's the subsidies price scenario, GAIL will continue to suffer. Government regulations play a very important role in policies and to that extent, the risk profile of the stock is higher.

Deregulation in natural gas pricing

Natural gas price is currently regulated with a price band of Rs 2,150 per TSCM (thousand standard cubic meters) to Rs 2,850 per TSCM. It is that the GOI shall soon deregulate the prices of natural gas. This would negatively impact earnings from its LPG and petrochemical business as it uses natural gas as a feedstock in the LPG and petrochemicals business. This would lead to decline in its margins in highly competitive environment

Latest Results (Dec 2003)

GAIL reported better-than-expected numbers for the quarter ended March 2004. The sales grew by 14.5% yoy from Rs2956 cr to Rs3383 cr in Q4FY04. According to the company, the increased turnover is mainly due to increase in polymer and LPG sales, LPG handling through the Jamnagar-Loni LPG pipeline system and sale of other liquid hydrocarbons and better sales realization from LPG. The company improved its operational performance. Its OPM improved by 280 basis points from 29.3% in Q4FY03 to 32.1% in Q4FY04. The net profit of the company grew by 13.5% yoy from Rs563 cr to Rs639 cr in Q4FY04.

For the full year ended March 2003, the company posted a 14.5% increase in net profit to Rs1878 cr in FY04 as against Rs1639 cr in FY03. The company’s net profit was up despite the sharing of subsidy burden of Rs428 crore payout for subsidizing LPG.

Valuations

GAIL has several distinct positives such as its monopoly in LNG business and high entry barrier. It has ambitious plans of entering into gas distribution in various cities and would follow Joint Venture model to tap this fast growing business. The JV model would help the company in quick entry as well as require low capex. There is tremendous potential in the long run as LNG would remain a fuel of the future. The stock is likely to head upwards as the initial selling pressure after the IPO seems to have subsided.

At CMP of Rs218, the stock trades at 9.8 times FY04 earnings of Rs22.2. We recommend a buy with a long-term perspective.

Financials

	Q4FY04	Q4FY03	% Change	12m FY04	12m FY03	% Change
Net Sales	3383.1	2955.9	14.5	12409.0	11767.8	5.4
Net Profit	639.0	563.1	13.5	1878.1	1639.1	14.6
OPM	32.1	29.3		27.2	25.7
EPS	30.2	26.6		22.2	19.4
Equity	845.7	845.7		845.7	845.7