After outperforming the Sensex by nearly 32% over the past six months, gas transmission company GAIL has some steam left for a positive movement. Analysts reckon that the reason for this is the increased volumes in the gas transmission business and also steady prices in the petrochemicals segment. The petrochemicals business remains resilient, with prices and margins rebounding strongly from October troughs. With current volumes of 120 mmscmd, its gas transmission volumes have already increased by around 40 mmscmd over the past nine months, an increase of nearly 50%. To put these numbers in perspective, in the previous nine years, from 1999-2000 to 2008-09, GAIL?s volume had increase by 23 mmscmd at a compounded rate of a meagre 3.7%.
Over next two financial years, analysts at Nomura Equity Research expect GAIL?s transmission volumes to grow by much a larger compounded rate of 21%. The gas transmission business contributes around 51% of the earnings before interest and its share is expected to rise to 68% in the coming years.
While the tariffs are expected to be stable, the volume growth in the business would add to the bottomline. GAIL?s tariffs are due for revision and would have a retrospective effect from November 2008 , post the new PNGRB regulation (12% post-tax return on capital employed as the basis). GAIL has already submitted its numbers for new tariffs to the regulator and indicated that as per the new tariff, the overall rate on existing networks would increase 5-10%, say analysts.
Moreover, the petrochemicals business, which contributes around 29% of the earnings before interest and tax, has also seen some amount of steadiness. LDPE prices have increased around 17% to $1,370 per tonne since their trough of $1,170/tonne in October. And then, there are positive surprises that could boost the company?s fortunes.
Analysts would be looking out for GAIL being allowed marketing margins on APM gas and also the likely rationalisation of GAIL?s increased share of upstream subsidy burden.
With this happening, market players expect a re-rating as the company?s share of the transmission businesses increases.