Gas Authority of India Limited (GAIL)

The Company

In the energy starved country of India, GAIL has a 78% market share of natural gas transmission. GAIL operates in all aspects of natural gas value chain – import of natural gas, Exploration, Distribution via pipelines to city grids that are coming up fast across the nation.

It has started to take some steps in the international market too.


Triggers for Growth

1. Urban lifestyle – As Indian urbanizes, end users are bound to move away from the prevalent system of having cooking gas delivered in metallic cylinders when households run out of gas. The “always available” concept of cooking gas in the Indian household is a vast market. Parts of New Delhi, the Indian capital have only had their first brush with piped cooking gas in the last year or two.
Through its nine joint ventures (JVs), GAIL has a presence in more than 12 cities. It plans to expand its network to 45-50 cities in the next 4-5 years. (http://www.moneycontrol.com/news_html_files/news_attachment/2010/GAIL_MOST.pdf)

2. Domestic Gas Finds – The vast gas finds in the Krishna-Godavari basin will mean that India’s energy mix will accommodate this domestic source of energy and hence the companies that lay down new pipelines to distribute the gas across India will have an inbuilt advantage that will be very hard to replicate.
From 2009 through to 20014, India’s gas production is set to treble and GAIL’s transmission volume is expected to double (http://www.moneycontrol.com/news_html_files/news_attachment/2010/GAIL_MOST.pdf)

3. LNG Imports – GAIL is also an equity participant in PetroNet a company that is dedicated to setting up ports in India for the import of LNG to Indian shores (http://www.petronetlng.com/).

Competitive Advantage

1. The Petroleum & Natural Gas Regulatory Board has set a 12% post tax Return on Capital Employed as a key benchmark that locks in a healthy margin.

2. The planned capacity expansion (in terms of length) from 6,624 km to 12,285 km and 154 mmscmd to 279 mmscmd cannot be replicated by a competitor in a few years.

Recommendation

If you are looking for a solid asset in these turbulent times, GAIL represents a good opportunity for the long term investor.
In the short term, GAIL may be required to hand out some money to subsidize the losses of the OMC (Oil Marketing Copanies) but it is not alone as far as that hand out is concerned (http://www.financialexpress.com/news/PM-to-look-into-petro-product-pricing--subsidy-burden-sharing/566663/). A contrarian view on this front might be that one day, the Indian state will be forced to free petroleum pricing and there could be a nice little bump in the share prices of the upstream companies (Including GAIL) to be enjoyed at that time.

GDRs for GAIL trade in London - http://www.lse.co.uk/shareprice.asp?shareprice=GAID&share=gail_(india)_ld_gdr_(repr_6_ord_inr10)(reg_s)