Gail Ltd. Report

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Company Background and Business model

GAIL (India) Ltd was incorporated in August 1984 as a Central Public-Sector Undertaking (PSU) under the Ministry of Petroleum & Natural Gas.  It is India's flagship natural gas company, integrating all aspects of the natural gas value chain with global footprints. They have also diversified into Exploration & Production, City Gas Distribution and are steadily developing their overseas presence.

The company is the largest player in the domestic natural gas transmission business, operating about 11,091.8 km of pipelines out of a total pipeline network of 16,470 km in India (as of Dec 2017). GAIL is also the largest gas marketer in India, supplying both domestic gas as well as Liquefied Natural Gas (LNG) to end-users. It also has presence in the petrochemicals, liquefied petroleum gas (LPG) and other liquid hydrocarbons (LHCs) and exploration and production (E&P) segments. It has doubled the capacity of its petrochemical plant at Pata, Uttar Pradesh to 900,000 tonnes per annum (TPA) in FY2016.

GAIL also has a presence in the renewable energy sector. It operates about 20 MW of wind power plants in Gujarat for captive use at its units. The company has also established 100 MW of wind energy projects in Tamil Nadu and Karnataka for commercial sale of power. It has also set up a 5 MW solar plant in Rajasthan under JNNSM.

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Corporate Governance:

Industry Growth

• The oil and gas sector is among the six core industries in India and plays a major role in influencing decision making for all the other important sections of the economy.
• The government has allowed 100 per cent Foreign Direct Investment (FDI) in many segments of the sector, including natural gas, petroleum products, and refineries, among others. Foreign investors will have opportunities to invest in projects worth US$ 300 billion in India, as the country looks to cut reliance on oil imports by 10 per cent by 2022.
• India’s oil demand is expected to grow at a CAGR of 3.6 per cent to 458 Million Tonnes of Oil Equivalent (MTOE) by 2040, while demand for energy will more than double by 2040 as economy will grow to more than five times its current size.

GAIL (India) Limited performance

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• The transmission volumes remained stable.
• Sales volume is on a stable rise.
• With upcoming of Jagdishpur Haldia & Bokaro Dhamra pipeline project (Pradhanmantri Urja Ganga Pipeline project) GAIL shall cover states of Uttar Pradesh, Bihar, Jharkhand, Odisha and West Bengal, by 2022, which will add huge capacity and market for the company. This project is going to add 4204 km and would incur around Rs. 20164 crores of which 40% of the cost is born by Government of India.

Our Analysis

• The company’s current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations. The higher the current ratio, the more capable the company is of paying its obligations. The company’s current ratio has increased from 1.01 to slightly higher than 1.09. A current ratio of over 2 is good for the company. The increase in the current ratio from 0.99 in 2016 to 1.09 in 2017 shows the company’s increasing ability to pay short term obligations.

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• The debt to equity ratio is a measure of a company’s financial leverage calculated by dividing its total liabilities by stockholder’s equity.  The company’s debt to equity ratio has fallen tremendously from 0.35 in 2013 to 0.08 in 2017. This decrease in the ratio shows the company’s decreasing amount of debt as a proportion to the equity.

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• The Return on Assets is an indicator of how efficient management is at using its assets to generate earnings. It is calculated by dividing a company’s annual earnings by its total assets. The ROA of the company had fallen by a large margin from 9% in March 2013 to 4.33% in March 2016. However, the company has picked up its ROA to 6.22% by March 2017.

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• Capital Employed is defined as total assets less current liabilities. Return on Capital Employed is a ratio that shows the efficiency and profitability of a company's capital investments. The ROCE after falling for 4 continuous years finally managed to increase in March 2017. This is a positive sign for the company.

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Our Recommendation

The positive outlook for the industry combined with the improved performance of the company over the past one year are the main reasons why we recommend ‘BUYING’ this stock. The Q2 results were also encouraging for the company. The company might very well be headed for a growth in the next year or more. Hence, it is better to buy the stock now.

Analyst Recommendations

1. Nomura

The agency has a positive outlook for the company after the good Q2 results. The earnings revival of GAIL is truly underway. Nomura also feels that the outlook for the industry is also positive. It hence recommends to ‘BUY’ the stock at a target price of Rs. 462.