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26th May 2008
Eyeing The Future
With the availability of natural gas slated to double in the next three years, Gujarat State Petronet will emerge as a key beneficiary as it’s aggressively expanding its pipeline network. Long-term investors can consider investing in the scrip
RAMKRISHNA KASHELKAR ETIG
GUJARAT STATE Petronet (GSPL) is India’s only company that transmits natural gas for its clients without trading in it. It has set up a 1,130-km-long natural gas pipeline network connecting various districts in Gujarat, which is India’s largest natural gas producing and consuming state. GSPL is expanding its pipeline network aggressively, which has put pressure on its financial performance due to a rise in interest and depreciation costs. However, the current investments will pay off well once more natural gas becomes available and the capacity utilisation improves. With the availability of natural gas slated to double in the next three years, GSPL will emerge as a key beneficiary. Long-term investors can consider investing in the scrip.
BUSINESS:
GSPL covers nearly 33 districts of Gujarat and its clients include Gujarat Power, Essar Steel, Essar Power, Arvind Mills, Gujarat Narmada Valley Fertilizers and Gujarat State Financial Corporation. The company operates its pipeline network on an open-access basis, which means that the transmission capacity is available to all shippers without discrimination. Since the company is not involved in buying and selling gas, it’s not exposed to fluctuations in commodity prices.
GROWTH FACTORS:
GSPL has an aggressive capital expenditure (capex) plan to invest Rs 1,900 crore by ’10 to take the pipeline network to 2,000 km. This will connect a number of gashungry industrial centres to the gas grid, bringing in more business for GSPL. With the natural gas regulator — Petroleum and Natural Gas Regulation Board (PNGRB) — becoming active, the wider reach of these pipelines will assume further significance. PNGRB will not allow GSPL’s competitors to lay parallel pipelines and the company will hold competitive advantage while bidding for new projects in adjacent areas.GSPL’s return on capital employed (RoCE) has remained at reasonable levels of 10-11% in the past couple of years. This is below the 12% RoCE allowed by PNGRB under its guidelines. Thus, there is hardly any risk of GSPL having to reduce transport tariffs in future.
GSPL transports around 17 million metric standard cubic metres of gas a day (mmscmd), but this will double with volumes from two contracts it signed recently. GSPL has signed a five-year agreement with Reliance Industries to transport 11 mmscmd and another contract with Torrent Power to transport 4.5 mmscmd for 20 years. Both these contracts are set to commission by the second half of the current fiscal itself, which will significantly improve the capacity utilisation of GSPL’s pipeline network. Over the next three years, the availability of natural gas in India is expected to double. RIL’s natural gas from the KG basin is expected to start flowing from the second half of ’08. Similarly, Petronet LNG’s expansion project is likely to finish by December ’08, doubling its regasification capacity to 10 million tonnes. Gujarat State Petroleum (GSPC) and ONGC are developing their gas fields on the eastern coast of India, which are likely to start flowing in ’10 onwards. All these will increase the availability of natural gas in Gujarat.
GSPL also holds strategic stakes in three city gas distribution companies — two in Gujarat and one in Andhra Pradhesh, which offer a natural and lucrative diversification opportunity to the company.
FINANCIALS:
The company has witnessed healthy growth during the recent quarters. However, the spurt in interest and depreciation costs on completion of the pipeline projects has impacted its net profits.
The company is charging depreciation onits pipelines at a higher rate, assuming just 12 years of working life. However, the lifetime of the pipelines is estimated at 30 years, which gives it an option to bring down the rate of depreciation any time in future. In fact, in the quarter ended September ’05, India’s largest gas transporter Gail had cut the depreciation rate to 3.17% from earlier 10.34%. A similar depreciation rate cut, if implemented, will boost GSPL’s net profit.
For the 12-month period ended December ’07, the company reported a 2.8% fall in net profit, despite a 35% jump in operating profit, as interest and depreciation costs soared. The volume of gas transported has increased steadily to cross 16.9 mmscmd for the 12-month period ended December ’08.
VALUATIONS:
As the contracts with RIL and Torrent Power become functional in the next 4-5 months, the natural gas volumes transported by GSPL are expected to double. This will bring in additional revenues, with the margins remaining intact. The interest and depreciation costs may rise as and when new pipelines get commissioned. However, for the year ending FY09, we expect the company to report earnings per share of Rs 2.1 and cash earnings of Rs 5.6 per share. Thus, at the current market price of Rs 67, the scrip is trading at a one-year forward P/E of 31.9. However, based on cash profits, the forward P/E works out to just 12.
Considering the aggressive depreciation policy adopted by the company, its real value is reflected by the growth in its cash EPS. Hence, for long-term investors, the scrip offers attractive returns.
Beta: 1.2
Institutional Holding: 29.8%
Dividend Yield: 0.75%
P/E: 47.8
M-Cap: Rs 3,760 cr
CMP: Rs 66.90
ALL PIPED UP
GSPL operates a 1,130-km pipeline network, connecting over 33 districts in Gujarat on an open-access basis
The company is investing Rs 1,900 crore over the next two years to nearly double its pipeline network
GSPL has firm contracts with RIL and Torrent Power, expected to become functional over the next few months, which will double the company’s volumes An improvement in the availability of natural gas in Gujarat will help it improve capacity utilisation
GSPL, which currently serves only bulk customers, is also investing in city gas distribution projects for future growth A substantial rise in interest and depreciation costs have pressurised GSPL’s profitability, but current investments will pave the way for future profitability The institution of a natural gas regulator in India is likely to benefit GSPL, as it will ensure that the company enjoys exclusivity rights on its existing & planned networks 
19th May 2008
Reaping Twin Benefits
Gujarat Heavy Chemicals is going in for a vertical split to list its textile & retail and soda ash businesses separately.This will unlock significant value for investors over a 12-month period
R AMKRISHNA KASHELKAR ETIG
GUJARAT HEAVY Chemicals (GHCL) is a leading soda ash manufacturer in the country, which aspires to become a global home textiles player, fully integrated from spinning to retail. While its soda ash business continues to grow, the company has made acquisitions in the US and UK in the home textiles space over the past couple of years. Its current market capitalisation (m-cap), though, does not fully reflect its home textiles and retail businesses. However, with the company going in for a vertical split to list its home textiles & retail and soda ash businesses separately, we expect significant value-unlocking for investors over a period of 12 months.
BUSINESS:
The company currently operates a 0.85 million tonnes per annum (mtpa) soda ash facility in India and has acquired a subsidiary in Romania with 0.3 mtpa capacity. The Romanian subsidiary is currently breaking even and is expected to turn profitable, thanks to high soda ash prices. In India, GHCL enjoys a unique advantage of owning captive sources of its vital inputs for soda ash such as salt, limestone, met coke and fuel. The company undertakes captive mining of lignite and has replaced imported met coke with briquette coke developed in-house.
GHCL has set up two spinning mills in Madurai with a capacity of 1.15 lakh spindles to manufacture cotton yarn, which is supported by a weaving, dyeing and printing unit at Vapi, with annual capacity of 36 million metres for home textiles.
In the home textiles arena, GHCL acquired three companies in the US and one in the UK. The UK subsidiary, ‘Rosebys’, is the largest home textiles retail chain with more than 300 stores across the UK. The US acquisitions include Dan River, HW Baker and Best Manufacturing Group, primarily catering to the B2B segment. GHCL is also rolling out a chain of 300 retail stores for home textiles in India, which will be present across exclusive and multi-brand outlets. GHCL also operates windmills, which generate carbon credits for the company. It has even set up business process outsourcing (BPO) units in India and the US.
GROWTH DRIVERS:
The uptrend in soda ash prices continues, thanks to strong demand. Soda ash prices are currently ruling around Rs 13,300 per tonne, which is nearly 20% higher than the average price for FY08. Similarly, the volume benefit from expanded capacities will accrue over the next few quarters as the company ramps up its capacity utilisation level to 90% by the end of ’08. GHCL also plans to increase its domestic soda ash capacity beyond 1 million tonnes in next 2-3 years.
On the home textiles and retail front, the company is in the process of turning around its acquired companies and streamlining processes. Its subsidiary in the UK, Rosebys, has already achieved break-even and the company is working hard to achieve breakeven at its US subsidiaries.
GHCL is currently in the process of splitting the company vertically to separate the home textiles & retail and soda ash businesses. The home textiles and retail business, which will have a turnover of over Rs 1,000 crore in the first year itself, will be separately listed on stock exchanges. This is expected to unlock significant value for shareholders. In line with other textile players, GHCL’s home textiles division has so far suffered due to the rupee’s appreciation. However, the outlook for the textiles industry is improving, with the rupee having weakened considerably over the past few months. Currently, at Rs 42.7 against the US dollar, the rupee is trading at a 13-month low.
FINANCIALS:
During the year ended March ’08, the company posted a 31% fall in its standalone net profit, mainly due to a dismal performance by its textiles business. A spurt in interest and depreciation costs also hurt GHCL’s profitability as its expansion projects in soda ash and yarn spinning businesses were complete. However, the benefits of these expansions are expected to accrue only in the current year. Over the past 10 years, the company’s sales have recorded a compound annual growth rate (CAGR) of 13.5%, while net profit has grown 7.8%.
VALUATIONS:
The spin-off of textiles and retail business is the most important trigger for the company in the near future. The new company with over 300 retail outlets in the UK, another 300 in India, institutional clients in the US, well-established brands and benefits of vertical integration is likely to command healthy valuations, despite the low profitability currently. We expect that GHCL’s shareholders will be allotted shares in the new company in a certain proportion under the demerger arrangement, which is yet to be finalised.
In the absence of any published data on GHCL’s overseas subsidiaries for FY08, we believe this business will report annual profit of over Rs 40 crore for FY09 and command a price-to-earnings (P/E) multiple of 20, taking the m-cap of the new company to above Rs 800 crore within a year of listing. Considering GHCL’s current m-cap of around Rs 850 crore, this provides a lucrative opportunity for value growth.
ramkrishna.kashelkar@timesgroup.com
14th May 2008
Ramakrishna Kashelkar & Karan Sehgal
Higher tax outlay dents Gail’s profit
WHAT was given by the fall in subsidy burden and overall improvement in performance was taken away by heavy spurt in the tax provisions for Gail in the quarter ended March 2008. Profits before tax for India’s largest gas transmission company doubled during the quarter as the subsidy burden declined 23% to Rs 387 crore. However, the tax provision at 34% of pre-tax profits was in sharp contrast to the heavy tax writebacks in the corresponding quarter of the previous year. As a result, the growth at the PAT level was stunted to just 6%.
Gail’s overall Q4 performance was healthier compared to the subdued Q3. The company reported sales as well as profits growth in all of its business segments. Particularly, the LPG and liquid hydrocarbons segment posted a major turnaround, as the turnover doubled despite a 5% fall in the volumes to 0.32 mt and profits soared past Rs 353 crore as against a loss in the Q4 of the last year.
Gail manufactures polymers from natural gas feedstock, hence this segment also benefited from the global rise in the polymer prices. The company expanded its polymer capacity by 25% last quarter, boosting the sales volumes by 10% to 1.1 lakh tonne during the current quarter. The sales from polymers were 17% higher and Q4 profits jumped 21%. The natural gas trading business reported over 40% jump in profits while the natural gas transmission business soared 36%.
Being a PSU, the company was affected by the recent Sixth Pay Commission recommendations. The company has made provisions of Rs 105 crore for the quarter as the staff costs jumped by 170% to Rs 220 crore. Going forward, Gail is likely to benefit from increased volumes of natural gas as the entire production of Panna-Mukta-Tapti consortium was transferred to the company with effect from April 1, 2008. Gail plans to invest Rs 3,413 crore during FY09.
Offshore focus props up Varun Shipping’s net
VARUN Shipping posted a higher growth rate in FY08 than the previous fiscal, thanks to its increasing focus on the offshore services segment. The company posted a growth of 29.4% in its total income while net profit swelled by 61.3% for the year ended March 2008. The company has strategically changed its revenue mix as offshore vessels contributed around 20% of its revenue this year compared with a minuscule 3.6% in FY07.
The offshore services continue to be an attractive area of investment as high oil prices have made exploration feasible in deep sea, leading to surge in demand for offshore vessels. The company has achieved a leadership position for offshore vessels as it has three anchor handling vessels in service, the highest among Asian shipping companies. At the start of 2008, the company had indicated plans to spend $400 million for expansion. It has already acquired one anchor-handling vessel, which leaves it with $300 million for further expansion. The company’s fleet size increased to 21 as of March 31, 2008, from 19 a year earlier. However, the debtequity ratio remained at 2.4:1, which is almost same as on March 31, 2007. This is due to sharp rise in top and bottomline, which has enabled the company to plough back enough profits so that debt to equity ratio does not get stretched. The company is already the leader in LPG shipping as it owns more than 80% of LPG tonnage under Indian flag.
12th May 2008
Taking A Break
Analysis of cos that have published their Q4 results so far offers little solace, as the trend of slowing growth rate in profits continues
Ramkrishna kashelkar
WE ARE still just half-way through the results season, even though the March ’08 quarter ended long ago. A fair number of companies (though not all) have already published their quarterly numbers. Hence, we at ETIG, thought it necessary to take a quick look at India Inc’s performance so far. While this is just an interim review of Corporate India’s performance, we will carry out a detailed analysis in due course, once all the results are announced. The analysis of 1,156 companies that have published their fourth-quarter results so far offers little solace, as the trend of slowing growth rate in profits — which had been haunting Corporate India since the past six quarters — is still visible.
During the March ’08 quarter, India Inc’s aggregate sales rose by 21.5% yearon-year. But operating profit took a hit due to higher raw material costs. Annual growth in operating profit at the aggregate level was just 14.3%, in line with the slowdown witnessed in previous quarters. Further, operating margin weakened to a two-year low of 17.1%.
Corporate India’s other income witnessed a slower growth as companies incurred foreign exchange (forex) losses due to weakening of the rupee against the US dollar during the quarter. As interest and depreciation costs rose moderately over previous year figures, the before-tax profits registered just 15% growth — the lowest in the past 12 quarters.
However, the provision for taxes remained flat compared to year-ago levels. A spurt in tax provisions by companies such as HDFC and Infosys Technologies during the March ’08 quarter was neutralised by substantially lower tax provisions by Mangalore Refinery and Petrochemicals (MRPL), Bharti Airtel, Maruti Suzuki and IFCI. Hindalco Industries, which amalgamated its subsidiary, Indian Aluminium, with itself during the quarter, reported substantial write-back of tax provisions which were made in the previous quarter. However, the stagnant tax burden offered little help to companies’ aggregate bottomline, which grew by 17.1% — again the lowest growth rate in the past two years. During the preceding few quarters, the growth in bottomline was higher on account of rising other income, rather than operating performance. This trend was discontinued during the March ’08 quarter. Excluding other income, the growth in net profit was 7.5% — better than just 5% witnessed in the December ’07 quarter.
12th May 2008
GREAT CHEMISTRY Lead Story
The chemicals industry is one of the few sectors that has done well after the recent downturn. Ramkrishna Kashelkar explains why this sector is worth a second look
AFTER THE meltdown earlier this year, the stock market has been range-bound for the past three months. While most sectors have been struggling on the bourses, an unglamorous industry has suddenly come to the forefront by demonstrating its ability to weather the storm.
We are referring to the chemicals industry — since January ’08 the ET Chemicals index fared reasonably well. Last year, the ET Chemicals index may have underperformed the broader benchmark ET100 index, but after the recent meltdown, it has made a stronger recovery compared to ET100. In the past three months, the ET Chemicals index gave returns above 6%, while the ET100 fell 3%.
Despite the strong performance, the valuations of the chemicals industry continue to remain reasonable, which offers scope for investment in this sector. While the average price-toearnings (P/E) multiple of the ET100 index stands at 18.7, that of the ET Chemicals index is 12.4, which is below its five-year average P/E of 13.1.
This is not surprising if one looks at the industry’s financial performance over the past few quarters. The aggregate performance of the chemicals industry in the September ’07 and December ’07 quarters was better compared to the rest of India Inc.
The industry’s growth rates in sales and operating profits have been rising at a time when other sectors are facing a slowdown. The chemicals sector is expected to turn in a similar performance for the March ’08 quarter as well.
A detailed analysis of 35 chemical companies that have published results for the March ’08 quarter reveals a robust revenue growth. Aggregate revenues rose 21% to Rs 2,514 crore.
Additionally, the industry has not just safeguarded its operating margins but has, in fact, slightly improved margins over the past six quarters to 16.8%. This resulted in a 30.3% jump in operating profit at Rs 421.8 crore.
However, the operating performance has been weighed down by rising depreciation costs and tax provisions. In particular, companies such as Sterling Biotech, Gujarat Alkalies and Navin Fluorine have reported a jump in their depreciation provisions, as well as deferred tax liabilities in the current quarter, influencing the overall numbers. The chemicals industry provides the basic building blocks for almost all other manufacturing industries such as textiles, pharmaceuticals, pesticides, packaging, metals and mining. With the manufacturing sector growing rapidly in India, the favourable effects on the domestic chemicals industry are already visible. The demand for basic chemicals is rising sharply, thereby enabling manufacturers to improve their margins. The recent inflation numbers have revealed the ability of the chemicals industry to increase prices and safeguard margins. The wholesale price index (WPI) of organic and inorganic chemicals was ruling nearly 7.5% higher during the first half of the March ’08 quarter, when the overall WPI index was up 4.5%. The prices of a number of chemicals such as acetic acid, ethylene glycol, soda ash, caustic soda, carbon-black are ruling at multi-year high levels. Changes in the international markets have also helped boost the outlook for India’s chemicals industry. China — India’s main competitor in the global chemicals industry — removed the incentives in the form of rebate of value-added tax (VAT) offered on several chemical products exported from China in mid ’07.
Similarly, it tightened up the environmental norms for effluent treatment, which affected the cost efficiency of Chinese producers. This has effectively eased the pressure off the Indian chemicals industry, particularly the dyestuff industry.
The industry’s buoyant outlook is now beginning to reflect on the investment front. A number of expansion projects have been lined up in the domestic chemicals sector and various existing players are implementing greenfield and brownfield expansions, as well as debottlenecking projects.
According to CMIE data, at the end of the March ’08 quarter, the chemicals industry had projects under implementation worth Rs 2,38,000 crore, with another Rs 2,43,000 crore in proposed investments. A year ago, proposed investments stood at half that number.
All of this augurs well for investors seeking opportunities in the chemicals industry. Depending on their risk appetite, investors can choose from two alternative approaches to identify the best investment bets in this industry.
A wide number of companies in this sector such as Foseco India, Clariant Chemicals, BASF, Kanoria Chemicals, Chemfab Alkalis and Pondy Oxides have been paying dividends on a consistent basis with healthy dividend yields. While their dividend yield will give assured returns on the investments, investors can also look forward to growth in earnings per share (EPS), thanks to the improved outlook for the industry.
Investors can also put their money in companies that are expanding capacities to boost their future profits. Companies such as Tata Chemicals, Sterling Biotech, Kanoria Chemicals, IOL Chemicals, Gwalior Chemicals, Himadri Chemicals and Hikal, among others, have expansion projects under implementation currently.
Thanks to the current improved outlook, the chemicals sector is likely to put up an excellent show — both in financial numbers, as well as on the bourses — offering excellent investment opportunities.
21st April 2008 Lead Story
There’s always an opportunity even in the worst of times. ETIG finds that investing in companies, which are thriving in these inflation-driven times, can provide some insulation against the rising cost of living
Ramkrishna Kashelkar, Supriya Verma & Pallavi Mulay
WHILE THE global media is making a hue and cry about rising inflation and its effect on the purchasing power of consumers, the other side of the coin seems to have been totally ignored. It is true that high inflation is hitting consumers hard, but investors can turn this to their advantage. Yes, there are a few industries which are gaining from inflation and investing in them will be a wise decision in the long run. The law of physics states that energy cannot be destroyed, but can be transferred from one form to another. Similarly, it can be said that in an economy, money cannot be destroyed (although unlike energy, it can be created out of thin air!), but transferred from one hand to another. Hence, if you are losing money due to inflation, there ought to be someone who is making money because of it. ETIG studied a host of industries to find out the leaders and laggards of inflation.
The A, B, C Of Inflation
But first, we need to analyse and understand the nature of current inflation. The current inflation is broadbased, as well as global. It is driven by rising demand for agricultural, metal and fuel products. Most experts agree that the present inflation is not a case of ‘lot of money chasing too few goods,’ but a genuine case of supply shortages.
India’s inflation, referred by the benchmark wholesale price index (WPI), had remained at around 4% for over six months since September ’07, but started rising in early ’08. For the week ended March 30, ’08, inflation reached a three-year high of 7.41% — substantially above Reserve Bank of India’s (RBI) target of 5%.
An important characteristic of the current rally in WPI figures is that it is widespread — the price index of manufactured goods jumped by 7.12%, primary articles by 8.89% and power & fuels rose by 6.65%. Primary articles have emerged as the largest driving factor for inflation over the past few weeks.
It must be noted that the current high inflation figure is suppressed, as the complete burden of rising oil prices is not passed on to consumers.
Losers & Gainers
There is a general belief that inflation is bad for the economy and industries. However, in reality, moderate inflation, coupled with adequate liquidity, is necessary for the industrial growth of any economy.
Amitabh Chakraborty, president (equity), Religare Securities says, “Moderate inflation is good for the stock market because a company’s pricing power increases, but a persistent inflation above 5%, with no growth, is stagflation, which is actually negative for the economy.”
Spiralling inflation above moderate levels hurts economic growth in different ways. The current inflation is building up raw material cost and hence, putting a pressure on margins. If this burden is passed on through an increase in prices of end products, the industrial sector will be least affected because of inflation.
But even the pricing capacities of these industries have limitations. Another factor is policy intervention to contain inflation and inflationary expectations. Fiscal and monetary measures undertaken for containment of inflation are more devastating than the underlying inflationary pressure.
Mr Chakraborty elaborates, “All interest-sensitive sectors will be hit, be it real estate, banking & financial services, automobiles and retail industry. We also believe the FMCG sector will be hit because higher inflation means less purchasing power in the hands of common man to buy soaps and oil.”
With a rise in prices of agricommodities, the FMCG industry may witness a pressure on margins if it cannot effectively raise prices. Vivek Pandey, fund manager, SBI Magnum Mutual Fund, says, “High costs will bring down operating margins of FMCG players by 30-40 basis points, which is more likely to be seen in Q1 FY09.”
But available evidence suggests that FMCG companies have so far done well and are posting strong growth in earnings, thanks to rising toplines and stable or rising operating margins. A similar trend is visible in other sectors including capital goods, chemicals, metals including steel, and cement among others (refer to Page 2).
Financials services, commodities and oil marketing companies are bound to face the brunt of inflation, says Rajat Rajgarhia, head of institutional research at Motilal Oswal.
He further adds, “It is a generally used strategy to raise interest rates to combat inflation. This will tighten money supply, which will affect the banking sector. Going forward, thanks to the government’s intervention, commodity industries such as cement or steel can also face a curb on free pricing.”
Make The Most Of It
Nonetheless, there is always an opportunity even in the worst of times. Out of the 16 industries analysed by ETIG, more than half show a positive or neutral impact of inflation. This offers investors a good opportunity to park their funds in inflationproof stocks. So, even though investors’ household budget may have gone out of shape, returns from the equity market may provide some insulation against the rising cost of living. Anyhow, in the long run, equity is the best hedge against inflation. As for your household budget, things may ease only after the next 6-7 months, when the government’s anti-inflationary measures begin to show results. ramkrishna.kashelkar@timesgroup.com
14th April 2008
Pump Up The Volumes
The short-term outlook for natural gas companies has turned negative, but their long-term prospects remain bright. Investors can consider Gail, Gujarat Gas and Gujarat State Petronet with a horizon of 1-2 years
Ramkrishna kashelkar
NATURAL GAS is a scarce commodity in India, with huge unmet demand and limited supply. It is a cheaper and cleaner source of energy compared to crude oil. However, it needs a network of pipelines for transportation from the point of production to the point of consumption. This has necessitated the development of natural gas transmission companies in bulk, as well as retail segments.
India today consumes around 95 million standard cubic metres per day (mmscmd) of natural gas, of which, over 65% is produced by state-owned exploration majors ONGC and Oil India. Nearly 20% of this is imported by way of liquefied natural gas (LNG), while the rest is produced by private players.
Among listed natural gas companies, Gail is India’s largest cross-country transporter with pipelines stretching over 7,800 km. Gujarat State Petronet is another bulk transporter of gas, but its infrastructure is entirely located in Gujarat. Gujarat Gas and Indraprastha Gas are retailers with well-established city gas distribution (CGD) networks.
India’s natural gas industry appears to be on the cusp of a major change with Reliance Industries’ Krishna Godavari basin oil blocks expected to commence gas production in the second half of ’08. When the gas production reaches its peak in ’09, the output is estimated to be equivalent to nearly 80% of India’s current consumption.
This will be supplemented by output from other players such as Gujarat State Petroleum (GSPC) and ONGC, which are also developing their oil & gas fields on the east coast. All put together, the availability of natural gas is set to jump three-fold in the next four years. This augurs well for natural gas transporters. Their revenues will shoot up as capacity utilisation levels of their networks increases.
In the short term, however, government policies are adversely affecting the growth of India’s natural gas industry. The government recently revoked the freedom of sale to third parties granted to the Panna, Mukta, Tapti (PMT) joint venture and appointed Gail as the sole evacuee for its entire production of 17 mmscmd. According to the government, this decision was taken to ensure sufficient gas supply to the priority sectors, viz fertilisers and power. However, the move goes against the commercial interest of PMT, which is the country’s largest producer of natural gas.
In another development, the Petroleum and Natural Gas Regulation Board (PNGRB) unveiled regulations for city gas distribution (CGD) projects. Besides setting out eligibility criteria and granting exclusivity to the players, these regulations put a cap on network tariffs and compression charges. The regulations also seek to cap the rate of return on capital employed (RoCE) at 14%.
While Gail stands to gain from this, private players are at the receiving end. As a result, their stocks have fallen heavily over the past couple of months. Gujarat Gas has lost over 33%, Indraprastha 23% and GSPL 24% — which is more than the 16% fall witnessed in the Sensex. In contrast, Gail’s stock has sustained its level at around Rs 425 between February and April ’08.
The redistribution of PMT gas will impact final consumers as well as transporters. Gail’s pipelines will witness an increase in volumes, and with the $0.12 per mmscmd transportation charges, the company will gain from this arrangement. On the other hand, Gujarat State Petronet will witness a minor reduction in the volumes transported through its network. Gujarat Gas is set to suffer as its supply has been curtailed by around 0.7 mmscmd. This will leave the company with limited volume of gas, which will be just sufficient to satisfy its existing CNG and PNG customers. As no alternative sources of gas are likely to be available in the near future, this will hamper its growth in the near term.
The cap on network tariffs and compression charges will also have a negative impact on Gujarat Gas and Indraprastha Gas, which operate in the CGD business. However, Indraprastha Gas will suffer more as it mainly uses gas at administered prices (APM). Indraprastha’s RoCE has consistently stayed above 40% for the past five years, which will now reduce sharply. The only solace for these players is that their marketing margins continue to remain free of these restrictions.
Thus, while the short-term outlook for natural gas transporters has turned somewhat negative, their long-term prospects continue to remain bright. As more gas becomes available, all these players will register healthy revenue growth on the back of higher volumes. Since the scrips of these companies have come off their highs substantially, investors should consider putting their money in them — particularly Gail, Gujarat Gas and Gujarat State Petronet — with a long-term horizon of 1-2 years.
