Investors with a long-term perspective can consider buying the stock of GAIL (India), the largest gas transmission company in the country. While the company expands its transmission network, concerns about volumes stagnating due to dip in domestic gas production have taken a toll on the stock. Also, news about proposed caps on marketing margins of gas companies has added to the pain.
Near-term concerns on GAIL's gas transmission business seem justified, as recent December quarter volumes remained stagnant. But GAIL's expanded network should hold it in good stead in the next two-three years when gas availability in the country is expected to increase significantly. Also, a cap on marketing margins, if implemented, is likely to be a long-drawn process, and may exclude imported gas from its purview.
Despite gaining last week on news of the Dabhol LNG terminal being commissioned soon, the GAIL stock has been an underperformer. At its market price of Rs 367, the stock price discounts its trailing twelve month earnings by 12 times, lower than historical levels (15-16 times).
Expansion bodes well
GAIL is progressing well on its expansion plans. The planned increase in pipeline network from 8,000 km to 14,000 km will boost its transmission capacity from around 170 mmscmd to 300 mmscmd by 2014. The expanded network would cover under-served but high-potential regions such as South India.
This should help GAIL meet the country's high demand for natural gas, which, given the commodity's cost advantage, outstrips supply.
The recent budget provision exempting natural gas imports for power plants from customs duty should further improve demand. The company's capital outlay for the expansion is expected to be around Rs 30,000 crore.
Given GAIL's big-ticket investments, there are concerns that gas shortage will result in the company's expanding network being under-utilised and its return metrics being depressed.
Decline in domestic gas supplies due to the dip in KG-D6 output has been an overhang on the GAIL stock. The concerns seem to be justified in the short-run.
Though the company has been able to maintain its transmission volumes by substituting imported gas (mainly spot cargoes) for domestic supplies, volume growth may be constrained in the near-term. Petronet LNG (the country's main gas importer and regassifier) is functioning at full capacity levels.
Over the long-run though, gas supplies are slated to rise significantly with capacity of existing LNG terminals being increased and new terminals being set up. At Petronet's Dahej plant, capacity is being expanded from 10 mtpa to 15 mtpa.
The first phase (12.5 mtpa) is expected to be complete by October 2013, while full expansion is scheduled for end-2015. Work is also on at the greenfield project at Kochi (5mtpa), which is expected to be commissioned by October 2012.
The Hazira LNG plant, operated by Shell, is also being expanded from 3.6 mtpa to 5 mtpa. Besides, both Petronet and Indian Oil are considering setting up 5 mtpa LNG terminals on the East Coast.
There is also likelihood of an increase in domestic gas supplies from 2014. All this bodes well for GAIL's pipeline utilisation.
In the near future, the 5 mtpa Dabhol LNG terminal, in which GAIL has 31.5 per cent stake, is expected to be commissioned by the end of this month or early April. This will operate at 30-40 per cent utilisation until the breakwater facility is ready in 2014.
Sourcing deals
To meet its long-term gas requirements, GAIL has entered into a deal with US-based Cheniere Energy to source 3.5 million tonnes of LNG for 20 years commencing 2017. It has also begun investing in shale gas assets in the US. The company is also expanding its petrochemical business, which accounts for more than 20 per cent of its profits.
GAIL's strong financial position (despite the subsidy burden it bears on controlled fuels) and low leverage (0.17 as on September 2011) gives it leeway to fund expansion plans.