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R. Yegya Narayanan

Coimbatore, Nov. 10 The new subsidy burden norm could affect the sentiment for GAIL (India) stock, say analysts.

Angel Broking and Bank of America Merrill Lynch have downgraded the stock to “reduce” and “under perform” respectively because of the heavy subsidy burden the company has to bear under the changed subsidy sharing formula.

GAIL (India), which transports natural gas and imported LPG and LNG through pipelines, has reportedly asked the Petroleum Ministry to exempt it from sharing the subsidy burden as it did not benefit from any uptick in crude oil prices.

GAIL has also planned a capex of nearly Rs 50,000 crore in the next five years that would help double the transmission capacity of the company.

Angel Broking quoted the management of GAIL as having told analysts at a recent meeting that it expected the average blended tariff to increase by 5-10 per cent under the new tariff regime – likely to be announced by December. Despite the increase in gas transportation volume, the tariff has not been cut. Angel Broking “factored in a decline in tariff by 8-10 per cent”.

GAIL’s management has indicated that it plans a capex of Rs 49,155 crore over 2010-14 with an overwhelming part (nearly 70 per cent) of it earmarked for the core gas transmission segment, which would double the transmission capacity and length of the pipeline.

GAIL’s pipeline is around 7,000 km long now and would go up to 14,000 km by FY-2013. Transmission capacity would increase to 300 mmscmd from 150 mmscmd. In spite of the doubling of pipeline capacity, management expected higher capacity utilisation at 70-75 per cent by 2012-13. However, given the gas supplies projected coupled with current supplies and future capacity of the pipeline, Angel Broking believes capacity utilisation to be 55-60 per cent. BoAML stated that “higher than expected subsidy is main risk to FY-10E earnings”, and “we retain under-perform on GAIL”. The subsidy sharing regime has been changed in the first half of FY-10 and its Q2 subsidy at Rs 460 crore was 45 per cent higher than Rs 320 crore calculated as per the old subsidy sharing regime. It kept GAIL’s FY 10E profit at Rs 2,750 crore, implying a 2 per cent y-o-y decline in net profit.

The GAIL (India) stock declined 1.17 per cent at Rs 370.15 on Tuesday on the BSE.

More Stories on : Stocks | Petroleum | GAIL (India) Ltd

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