Gas Authority of India Ltd, a monopoly player in the gas transportation business, has a strong balance-sheet and relatively risk free returns. However, the interest free gas pool account float, which helped finance expansions, will no longer be available, says Lloyds Securities. Hence, there is no room for any major growth, apart from increase in tariff which has already been implemented in line with the Shankar Committee recommendations. At Rs 158.50, the expensive valuations clearly outweigh GAIL's strengths.

According to Lloyds Securities, the sharp increase of Rs 200 crore and Rs 606 crore, respectively, in other income during 1996-97 and 1997-98 (estimated) is primarily due to ad-hoc releases from the gas pool account. After the one-time increase in HBJ tariffs from Rs 850 to Rs 1,150 per 1,000 cubic metres, net earnings are expected to flatten till fiscal 2000 (see table).

Most of the capex incurred by GAIL in the HBJ capacity enhancements and the ethylene unit will start contributing to the turnover in fiscal 1998. Projects like the LPG capacity expansion in Lakwa (the fate of which is still undecided) and Ulsar will not make a significant contribution to net earnings. The ambitious LPG pipeline project will take at least 42 months to complete after it receives clearances. Other projects like LNG imports and city gas distribution will be joint ventures, ruling out any major contribution to earnings.

Internationally, agreements between the gas producer and the transporter include a take or pay in return for an assured quality clause. In turn, the transporter strives to book its gas sales through the take or pay clause with end-users. ONGC supplies most of GAIL's requirement. As private parties are expected to account for only 10 per cent of GAIL's purchases and there is no formal agreement on penalties in the event of non-supply, GAIL's volumes are not only constrained, but are also vulnerable to fluctuations in ONGC's production.

Further, GAIL has always enjoyed the benefit of interest free utilisation of credits in the gas pool account, which stood at Rs 1,173 crore in March 1997. Currently,GAIL is managing the account as the only claimants are OIl India, ONGC and GAIL itself. However, with private producers like Reliance, Enron now on the scene, pool management is expected to be transferred to the ministry of petroleum and natural gas. The pool credits are expected to increase by Rs 200 per 1,000 cubic metres per annum in line with the Shankar committee recommendations.

As part of its recommendations. the administration of the pool account was to be done by either a separate committee or by the OIl Coordination Committee. The credit, if any, at the end of the five-year pricing period would be transferred to the national exchequer. This would imply that the gas pool account float enjoyed by GAIL, which helped when heavy investments were being made in the HBJ rehabilitation and the petrochemical complex, would vanish.

Assuming that the Shankar committee report is implemented in toto, most of the increase in end-use price will go to the gas pool account to meet the higher prices paid by the private users. Assuming also, that the government grants GAIL the required 12 per cent post-tax return on investment, the dearth of investment in gas transportation and distribution in the short to medium-term will not provide any benefit.

Since GAIL was listed on BSE it has seen volatile movements due to poor liquidity, but has stabilised at a price-earning multiple of 18-20 on historical earnings. The current PE is at a substantial premium to the sensex. Considering the risk-free and predictable nature of its earnings, Lloyds Securities forecasts that GAIL will continue to trade at a premium of 10-15 per cent to the market. The current price of Rs 158.50 leaves very little scope for significant appreciation.

In the first-half of 1997-98, GAIL has reported a 52.7 per cent rise in net earnings from Rs 5,37 crore to Rs 820.1 crore. The rise in net earnings has been driven by a 67 per cent rise in other income from Rs 381.8 crore to Rs Rs 637 crore. This, in turn, is due to the release of around Rs 600 crore from the gas pool account constituting the arrears of margin hikes. The pure operating margins (excluding other income) has increased from 15.5 to 17.1 per cent.

Until 1998, GAIL incurred losses mainly due to the underutilisation of the HBJ pipeline. After the transfer of ONGC's pipelines (around 680 km) at a paltry book value of Rs 30 crore, profits jumped from Rs 22.73 crore in fiscal 1991 to Rs 210.53 in fiscal 1993. The surge in sales from around 3,000 cubic metres in fiscal 1990 to 12,218 cubic metres in fiscal 1993 was on account of the ONGC pipeline transfer and higher capacity utilisation of the HBJ pipeline, which increased from 45 to 75 per cent during the period under consideration. Moreover, higher gas sales were on account of the reduction in flaring from 35 to 10 per cent, although gas production has a compounded annual growth rate (CAGR) of only 2 per cent. Thereafter, GAIL's volumes have been severely restricted by domestic availability.

GAIL was also helped by the gas pool float, that it carried, with interest costs falling from Rs 101.02 crore in fiscal 1992 to Rs 61.2 crore in fiscal 1997. Return on capital employed was less than 5 per cent till fiscal 1991 due to underutilisation of the HBJ pipeline. The returns increased in fiscal 1993. Thereafter, returns averaged 20 per cent. Returns increased sharply in fiscal 1996 and 1997 due to lower growth in capital employed. Future returns are expected to remain in the 19-21 per cent band.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.