GAIL continues its effort to increase its pipeline infrastructure and enter into multiple tie-ups in the LNG space to boost gas transmission volumes. This has helped the stock gain some of the lost ground to Rs 367 currently. However, the benefits arising from these as well as commissioning of new LNG terminals at Kochi and Dabhol by December 2012 will largely accrue gains for transmission volumes in the medium to long term. In the near term though, underutilisation of its pipeline infrastructure may continue. In this backdrop. Analysts see limited upside for the stock.
The stock, which was on a downtrend trend after it topped at Rs 524 in January 2011, had fallen to its 52-week low of Rs 303.10 on May 18, 2012 as concerns increased on transmission volumes due to falling gas production from Reliance Industries’ KG basin. News of fuel price hikes, which will help reduce subsidy burden for all public sector oil companies, has also partly helped the stock recently. However, uncertainty on subsidy sharing will remain an overhang as clarity on the same is mainly achieved at the end of the year.
The consensus target price for the stock as per Bloomberg data at Rs 388 indicates marginal upside from current levels. However, given the likely gains from FY14 onwards, long-term investors could consider on dips.
Subdued transmission volumes
The stress of lower availability of gas in the country after gas production from KG D6 basin started declining has been evident from gas transmission volumes reported by GAIL. The company had reported gas transmission volumes of 109.8 mmscmd (million metric standard cubic meters of gas per day) during the June 2012 quarter, lower than 115.8 mmscmd during the March 2012 quarter. While this dip may have been marginally higher due to seasonal shutdown by some fertiliser plants, nevertheless transmission volume estimate for FY13 stand at 114-118 mmscmd according to various analysts, indicate limited upside.
Long-term gains
The management expects the incremental natural gas of 10-30 mmscmd from ONGC’s marginal fields, KG Offshore and Mahanadi Basin discoveries in the medium to long term. Reports indicate that the company is already receiving around 1.5 mmscmd from ONGC’s C-series fields and expects around two mmscmd more to come by end-FY13.
The commissioning of Dabhol (five MTPA; million tonnes per annum) and Kochi (five MTPA) terminals by December 2012 is positive, and will boost volumes but only from FY14 onwards. One MTPA of LNG is equivalent to four mmscmd. The Dabhol terminal will start receiving shipments by December 2012. However, analysts expect full commercial operations to start only in FY14. Analysts at Motilal Oswal Securities expect Phase-1 of Kochi-Mangalore-Bangalore pipeline to be commissioned along with Petronet LNG’s regassification terminal and Phase-2 by December 2013.
| SUBDUED OUTLOOK | |||
| In Rs crore | Q1’ FY13 | FY13E | FY14E |
| Net sales | 11,112 | 50,054 | 53,493 |
| % Y-o-Y change | 25.0 | 13.3 | 6.9 |
| Ebitda | 1,923 | 7,868 | 8,582 |
| Ebitda (%) | 17.3 | 15.7 | 16.0 |
| Adjusted net profit | 1,134 | 4,305 | 4,560 |
| Y-o-Y change (%) | 15.1 | -3.1 | 5.9 |
| EPS (Rs) | - | 33.9 | 36.0 |
| PE (x) | - | 10.8 | 10.2 |
| E: Estimates Consolidated financials, except for Q1 FY13 which is standalone Source: Elara Capital | |||
The company had commissioned 1,337 km of new pipelines and auxiliary systems in FY12. While Gail operates more than 9,500 km of gas pipelines in India with a transmission capacity of 172 million cubic meters, it has many other expansion plans in progress. It also has announced new Surat-Paradip and Jagdishpur Haldia projects. However, analysts at Spark Capital in their note observe that capacity utilisation in the new pipelines would continue to be low in FY13-14 on declining domestic supplies and thrust to increase RLNG capacity along with rigorous gas sourcing efforts would drive throughput momentum FY15 onwards.
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The company is ramping up its LNG supplies from various tie-ups. Apart from its LNG sourcing tie-ups with US companies, recently it entered into a few short-term (one to three-year contracts). Among these include an agreement with GDF Suez, the French energy giant wherein GAIL will be receiving a total of 12 cargoes from 2013 to 2014, representing 0.8 million tonnes of LNG. Further, on the September 3, GAIL inked another agreement with Gas Natural Fenosa, Spain to ensure a supply of three billion cubic meters of LNG over the next three years starting January 2013. All this bodes well and benefits will accrue but mainly during FY14-16.
However, a few analysts (like at ICICI Securities) feel that the current decline in LNG prices to $10 per mmbtu levels should trigger higher volumes, too. They add that the gas transmission business offers strong long-term value through capacity expansion, especially since they expect a bearish trend in LNG prices.
Meanwhile, GAIL’s petchem business (about five per cent of sales and 11 per cent of profits) could provide some boost in two to three years, as the company plans to double its highly profitable gas-based cracker capacity. The company is also doubling its petchem plant capacity at Pata in UP from 9,00,000 tonnes per annum, which is expected to be completed by December 2013.