Stock Review: Gas Aauthority India Limited (GAIL)

 

 

Gail's aggressive plans to grow natural gas volumes and have a strong balance sheet augur well for the company in future. Long-term investors can consider buying this stock

   NOW that key regulatory issues are behind, Gail India's business model appears devoid of significant risks. The company's aggressive growth plans, such as growing natural gas volumes, have a strong balance sheet and a track record in timely project implementation will boost its stock's attractiveness. Long-term investors can benefit from the company's heavy capex cycle over the next 2-3 years.

BUSINESS:

The public sector natural gas major operates India's largest natural gas pipeline network with current length of 7,200 km and a transmission capacity of 150 million standard cubic metres per day (mmscmd). It also produces over 1.4 million tonne of liquid hydrocarbons, including LPG and 4.2 lakh tonne of polyethylene capacity.

   To extend its presence through the entire natural gas value chain, the company has also invested in 27 exploration blocks, including operatorship in two. The company also owns promoter's stake in Petronet LNG and seven other city gas distribution companies including Indraprastha Gas. The company has floated a subsidiary, Gail Gas, to lay CNG stations along the highways.

GROWTH DRIVERS:

The company has embarked on a heavy capex programme that will triple its gross block within the next four years. This will double its transmission capacity to over 300 mmscmd by the end of FY14.

   The natural gas availability in India will grow in the coming years, mainly with Reliance Industries' KG basin production and ONGC's marginal fields. India is also importing increasing amount of LNG on a spot basis. Going forward, commissioning of LNG terminals at Dabhol and Kochi would bring in additional volumes, which will be augmented by any success of exploration efforts in the CBM and other fields.

   Its 70% subsidiary, Brahmaputra Cracker, is setting up 280,000 TPA polymer unit in Assam at an investment of 5,460 crore by March 2012.
   It is expanding its petrochemicals capacity to 0.9 mmpta by FY15. The company also holds a stake in the 1.1 mtpa -ethylene cracker that ONGC is setting up under ONGC Petro additions (OPaL) at Dahej.

   The company already has eight operational joint ventures in city gas distribution. Besides, its wholly-owned subsidiary Gail Gas holds approvals for four CGD projects.

   The uncertainty over transmission tariffs is over with the regulator approving tariffs, which will be revenue-neutral for the company. The company's subsidy sharing burden has not increased in line with its growth, which reduced its impact to less than 5% of its net sales in FY10. The company is trying hard with the government for an exemption from sharing the underrecoveries of oil marketing companies.

FINANCIALS:

The company, which grew at a cumulative annualised growth rate (CAGR) of 12.7% for a decade till FY08, has improved its growth rate to 19.8% per annum thereafter. It is lightly leveraged with strong cashflows and a healthy bank balance. However, to finance its aggressive expansion plans, the company will have to raise debt of nearly 15,500 crore in the next two years.

   Being a PSU, the company has been sharing under-recoveries of the oil marketing companies since FY04. On a cumulative basis, the company has given discounts to the

   extent of 8,900 crore. The amount of subsidy is decided by the government on an ad hoc basis and hence this factor remains the biggest uncertainty for the company.

VALUATIONS:

At the current market price, the company is valued at 17.8 times its earnings for the past 12 months. It is trading at just 3.6 times its book value, which is lowest among its smaller peers. For FY11, the company is expected to post net profit of 3,815 crore for FY11 on a consolidated basis, which discounts the current valuation at P/E of 15.8.