GAIL is an excellent long-term pick at Rs350

GAIL (India) is the largest natural gas transportation company in India with 6,700km of high-pressure pipeline and a capacity of carrying 148 million standard cubic metres a day (mmscmd) of natural gas. It has plans to expand the gas transmission capacity to 14,000km by FY12-13 which, in turn, will increase the transmission capacity by 150mmscmd. It expects to complete the Dabhol-Bengaluru and Kochi-Mangalore/Bengaluru pipelines by December 2011.

However, since these pipelines are dependent on gas supplies from Petronet’s Kochi terminal, which is likely to come up in September-December 2012, these pipelines may get delayed.

With the expansion of its own infrastructure, it also expects incremental gas flow from domestic suppliers as well as LNG imports. With the recent capacity expansion of Petronet’s Dahej terminal, coupled with commencement of LNG supplies from RasGas, GAIL’s LNG volumes are likely to increase by 10mmscmd. It also expects to be able to trade spot LNG volumes of 4-5mmscmd. In the domestic market, it expects 35-40mmscmd of gas flow from Reliance’s KG Basin block to the power plants located in its transmission network.

Revenue growth in the December quarter was only 7% while operating profit grew 376% compared with 3QFY08-09. This is because of higher gas transmission and lower subsidy. High revenues came from transporting about 25mmscmd of KG-D6 gas from Reliance. It also paid only Rs455 crore as subsidy, compared with Rs905 crore a year ago, which boosted profits.
The March-quarter performance would be marred by higher share of subsidy.

Five-quarter sales and operating profit growth was 15% and 49%, respectively. GAIL’s market-cap is 2.08 and 13.3 times its sales and operating profit, respectively. The stock is an excellent long-term choice, given its expansion plans, provided you buy at around Rs350.