New Delhi: The ripple effect of the expected decline in Reliance Industries Ltd’s KG basin gas production (Read about it) is being felt in other companies too. Gas Authority of India Ltd (Gail) and Gujarat State Petronet Ltd, to name just two. Both firms lift gas from Reliance and transport them to user industries.
Brokers are now scrambling to figure out the impact of the KG basin decline on the earnings of these two companies.
There are no watertight estimates of the exact impact on Gail and GSPL but a sensitivity analysis done by BRICS Securities analysts Sandeep Randery and Nilesh Ghuge found the former’s earnings to be more vulnerable.
According to their estimates, Gail’s earnings per share (EPS) will decline 7.5% in 2011-12 if volumes decrease by 5%. For GSPL they expect the EPS to decline 6.7% the next fiscal for a similar fall in volumes.
We examined effect of lower transported volumes on EPS…….Our analysis shows that GSPL’s earnings and DCF value is more resilient of the two companies to equivalent drop in gas volumes.
Both the companies were already struggling to sustain volume growth on weak gas production from KG basin and high LNG prices. According to Kotak Securities, GSPL witnessed flat volume growth of 0.6% in the third quarter. Even though Gail managed a 10% rise in the natural gas transmission segment, analysts were worried about the companies’ ability to sustain volume growth due to stagnant production at KG basin.
In notes released this January, many brokerages had forecast a pickup in KG basin gas volumes. But now numbers have to be reworked. While Reliance Industries has shed 3% since the news broke, after an initial sell off, investors in Gail and GSPL seem to have shrugged off the impact. At least for now.