Going up on gas

SMARTSHARE

I heard an interesting investment argument recently. India has a growing demand-supply gap in energy. Over the next five years, gas will be supplied from various sources. One possible source is commercial exploitation of the Krishna-Godavari basin off the East Coast.

There will be imports via various terminals at Hazira, Dahej, Kochi, Mangalore etc. There may be cross-border imports from Myanmar and Iran. Companies like Gail, Reliance, Shell, Petronet, GSPC, Indraprastha Gas, Gujarat Gas etc, will be involved.

There are four major potential consumers. The largest is the power sector, which will double generation capacity by 2012. Generators like NTPC will be happy to switch to gas-based plants if assured of stable supply. The fertiliser industry will be another major consumer since it uses gas as feedstock.

The third consumer is the transport sector. Pressure from civil society will lead to conversion of urban public transport to gas. The fourth consumer is the housewife. As gas supply improves along with per capita income, more households will switch to gas.

As for the regulatory environment, it's unclear. Gas prices will remain controlled until some undefined future. The draft gas policy recommends the appointment of an independent regulator. But there is no set timeframe and it would be optimistic to expect this to happen fast.

The draft also recommends Gail be split into two entities to minimise conflicts of interest caused by its monopoly position as transporter-cum-marketeer. Otherwise, Gail could hold every other player to ransom.

So the gas sector will see policy flux, price-control and the possible continuation of monopolies even as it sees capacity expansion involving huge investments. That makes the future profitability of producers, marketeers and transporters tough to judge.

Nevertheless there's an investment opportunity in the transport infrastructure. Wherever it's sourced at whatever price, gas must be delivered to consumers. That means at least 12,000 km of new pipelines costing about Rs 25,000 crore.

There are plans to build pipelines from Kakinada (AP) to Uran (Gujarat). The Hazira-Bijapur-Jagdhishpur line will be extended to Haldia with branches at Dadri, and Dahej and HBJ may eventually be connected to Myanmar through Bangladesh-Assam. There will be a Kochi-Coimbatore-Bangalore pipeline from ONGC's terminal in Kochi. Plus, there could be an Iran-Pakistan pipeline.

Somebody must supply those steel pipes. So, it can be argued that steel pipe manufacturers such as Maharastra Seamless, Jindal Saw etc, are guaranteed large orders from the gas sector. This will also ensure that the domestic steel industry stays buoyant over this period and that's useful, given the recent trend of softer steel prices.

Jindal Saw has a September year-ending. On the basis of the six-month performance of October'04-March'05, it will close 2004-05 with at least 70 per cent earnings growth.

On current price, the annualised PE is about 14. Jindal Saw has already exceeded its full-year 2003-04 turnover within the first half of 2004-05.

Maharashtra Seamless has seen 55 per cent rise in turnover to Rs 879 crore in 2004-05 coupled to an 18 per cent rise in PAT to Rs 85 crore. An equity expansion is on the cards in Maharastra Seamless.