Stock Review: GAIL

The increase in availability of gas in the country continues to benefit GAIL, which reported its highest ever quarterly revenues for the June 2010 quarter on Monday. Higher volumes and better realisation across business segments boosted its net profit during the quarter. Analysts are upbeat about GAILs prospects and estimate that volumes will increase further leading to an earnings growth of 10-25 per cent over two years. This should help the stock deliver good returns over the next one year.

Volume boost

Gas transmission volumes for GAIL have been on an uptrend -from the time RIL commissioned natural gas production from its KG-D6 basin around

March 2009 .The volumes gradually improved from 80-85 million standard cubic meters per day (mscmd) to 115 mscmd in March this year.

For the June quarter, transmission volumes stood at 116 mscmd, which reflects an increase of 20.2 per cent year-onyear. Although this business accounted for just 11 per cent of revenues, it contributes about 46 per cent to segment profits, and helped boost profit growth.

Analysts believe that GAIL may end the current year with transmission volumes of 116-118 mscmd against 107 mscmd in 2009-10. But, with GAIL's capacity expected to increase by 20 mmscmd from December 2010, they expect volumes to increase by 18-20 per cent in 2011-12.

In the gas trading business, too, volumes grew at a healthy pace which - along with the increase in administered gas prices (APM) and GAIL being allowed to charge marketing margins on APM gas sales - aided profit growth for the quarter. GAILs other businesses, especially LPG and liquid hydrocarbons, also did well, led by an increase in production and higher realisations.

On the flip side, consequent to higher crude oil prices, GAILs subsidy outgo nearly five-fold to Rs 445 crore, and restricted its profit growth during the quarter.

Investment rationale

Going ahead, while the expected rise in Indias gas production as well as higher liquefied natural gas imports by the likes of Petronet LNG and Shell will improve availability, the increasing urge towards this cleaner and cost efficient fuel (gas) will help sustain demand, ensuring higher volumes for GAIL.

On its part, the company is investing in augmenting its pipeline infrastructure (besides petrochemicals capacity), which should support the increase in volumes. While the overhang of subsidy sharing is likely to remain for some time (till the recommendations of Kirit Parekh committee of excluding GAIL from subsidy sharing gets accepted), GAILs medium-term growth prospects continue to look good.

Based on sum-of-the-part valuations, analysts have pegged a value of Rs 530 to the stock, which indicates good upside from the current levels.