GAIL June Review

Gas Authority of India limited
It is a natural gas company which is into the business of Gas transmission

June 2010 review (Amsec)

About the Company

1. Established in 1984 by GOI to develop gas infra in the country. (Gas Transmission)
2. Also involved in petrochemical business, Liquid hydrocarbon business and Optical fibre cable business, exploration and production and CGD businesses.
3. Transmission business – Natural Gas transmission (80% mkt. share) and LPG transmission
4. Natural Gas trading – Buy wholesale from OMCs and sells it.
5. GAIL has 20% of Indian Polymer market. Products are HDPE and LLDPE for plastic industry.
6. Has total hydrocarbon facility of 1.3 mmtpa. 12% of total LPG production.
7. GAILTEL has 13000 km of Optical fibre cable network at is in 200 cities.
8. E&P is to vertically integrate and it has been successful to get 30 blocks (10%-80% participating interest).
9. Power Generation unit (RGPPL) has 1940 MW gas based power plant at ratnagiri. ( 5 mmtpa LNG degasification terminal ) Produces 1000 MW of power.

Review Short note

1. Mega capex plans of Rs. 429 bn ( Rs. 4290 cr.) to expand the pipeline infrastructure
2. Gas transmission business is expected to grow at 19% CAGR
3. PNGRB (Petroleum and Natural Gas Regulatory Board) tariff increase is a positive ( blended tariffs)
4. Transmission volumes to double from 108 mmscmd to 208 mmscmd by 2014 ( 17% CAGR growth)
5. Transmission capacity to to be increased from 155 mmscmd to 330 mmscmd
6. Currently 30mmscmd flows through KG D6 to GAIL, to be increased to 35 mmscmd by this year.
7. Current gas transmission network at 7200 km. Planned to expand the same to 14000 km.
8. CGD (City gas distribution) is the focus for GAIL through GAIL gas limited.
9. E&P (Exploration and production) portfolio of 27 oil and gas blocks and CBM (Coal Bed Methane) blocks. 4 bn investments to be made on a yearly basis through 2014
10. EBIT contributions from transmissions expected to increase from 43.9% to 63.6% through FY 14 ( Making it a utility play)
11. FY11 P/E is 13.5X and EV/EBIDTA is 7.6X
12. Increase in target price with P/E multiple of 15X.



Gas Transmission Business - GAIL

1. World Class discoveries in the east coast ( KG basin)
2. Availability of natural gas and LNG to improve and grow at 19% CAGR
3. Nations plan to have a national gas grid for extensive gas transmission infrastructure
4. Transmission volumes to increase because of the KG D6 discovery.
5. RILs KG-MMA (10 mmscmd), ONGC KG-DWN -98/2 (25 mmscmd) and GSPCs Deendayal block (15 mmscmd) might get monetized by 2014
6. Increase in tariffs to Rs. 35.39/ mmbtu from 28.48/ mmbtu for the existing HVJ-GREP-DVPL line (DAHEJ VIJAIPUR GREP) and Rs. 62.12/ mmbtu for the combined DVPL/GREP up gradation system.
7. Increase in tariff for new pipelines to be at 53.65 / mmbtu
8. Overall if the new tariff get implemented it will have an 18% increase in tariff boosting GAILs profitability
9. Increase the petrochemical complex capacity at Pata UP from 410 ktpa to 500 ktpa. To be increased to 800 ktpa by FY14.
10. BCPL (70% GAIL stake) assam would have capacities of 220 ktpa ( ethylene) and 60 ktpa (propylene).However this business is cyclical.
11. CGD licenses for a demand potential of 74 mmscmd. In 250 cities by 2018. Total 11 cities have been awarded till now. Currently GAIL operated nine CGD through JVs.
12. Recently formed GAIL gas limited for exclusive CGD business. It was won licenses in Kota, Dewas, Meerut and Sonepat. Expected to break even by FY 11. Capex decided at Rs. 0.5 –1 bn. Growth expected to be at 24% through CGD.
13. 10% stake in overseas blocks in Myanmar A-1 and A-3. Cauvery basin is a major gas discovery block and Cambay basin is a major oil discovery block.
14. Subsidy sharing might be removed as and when the Govt. decides to free the auto fuel pricing.
15. The subsidy burden is placed at 9% for GAIL it would entail Rs. 246 cr. which might come down to 150 cr. if govt. decided to tinker with the subsidy scheme.

Industry

1. Gas used in power generation, fertilizer production, industrial fuel in steel and petrochemical plants and transportation fuel.
2. Contribution of natural gas to the primary energy mix has risen from 1% in 1980 to 9% currently. Globally this proportion is 24%. To become 20% by 2020.
3. Domestic gas supply to increase at 20% CAGR over FY 14.
4. LNG capacity to increase from 14 mmtpa to 30 mmtpa by FY 14.
5. Current demand for Gas is at 226 mmscmd whereas supply is 155 mmscmd (31% deficit)
6. 4800 MW of Gas powered power stations to come up in the next 4 years. Captive power capacity to increase to 7500 MW.
7. Demand from power and fertilizer sector is expected to grow at 10% CAGR.
8. CGD would have a demand growth of 12% CAGR

Disadvantage/ Risks

1. Laying pipes which involves a lot of money becomes unviable if there isn’t a steady stream of supply.
2. The existing pipelines are skewed towards northern India hence industrial development is seen more in the northern India.
3. National Gas grid to set up pipelines in under developed regions to promote inclusive growth.
4. A delay in increase in production level at KG D6 and delay in commencement at RIL ONGC and GSPC blocks by 2014 would have a negative impact on valuation.
5. Additional petrochemical facilities coming up in China and Middle East would dampen the polymer prices. Thus realization from petrochemical businesses might get affected.
6. No change in the subsidy sharing policy may adversely affect GAIL prices.

Financial Analysis

1. Top line growth of 16.2% over FY 06 to FY 10
2. Expected revenue CAGR of 10.4% over FY14.
3. Transmission services contributed 12.2% to GAILs revenue which is expected to increase to 225 by FY14.
4. Transmission business which is a high margin business is expected to improve GAILs EBIDTA from 20.5% to 30.3%
5. Currently it has a low gearing at 0.3X.
6. Adjusted PAT increased by 44.6% YOY on better operating margins, lower interest costs and higher other income.
7. GAIL’s subsidy burden was down from 17.8 bn to 13.3 bn.