GAIL: A good but expensive play

The GAIL India stock has had a good run this year and, since January 2009, gained nearly 60 per cent compared with a rise of around 52 per cent for the Sensex. At the current price of Rs 329, the stock trades at approximately15 times estimated 2009-10 earnings and, given that the earnings are estimated to grow 9-10 per cent in each of the next couple of years, seems a tad expensive, say analysts.

GAIL is a large player in gas transmission and the country’s gas supply should effectively double once production at Reliance Industries’ KG-D6 basin is fully ramped up within the next year or so. Already, GAIL’s gas transmission volumes in the June 2009 quarter were higher by about 16 per cent over the 2008-09 levels, since production at the KG-D6 basis had started.

However, GAIL’s cyclical LPG business and the petrochemicals business could be a drag on profits — in the June 2009 quarter, revenues from the petrochemicals business came off by 22 per cent. The increase in the company’s net sales of 5 per cent year-on-year to Rs 6,000 crore was driven mainly by a 13 per cent rise in trading revenues from natural gas, which contributed about three-fourths of the revenues.

Merrill Lynch believes there could be some risks to the tariff in the gas business with the environment becoming tougher and more competitive. Tariffs could be lowered somewhat, it feels. While GAIL’s volumes are expected to rise, there could also be some competition from those putting up new pipelines.