GAIL (India) Ltd announced on Monday that it will set up a joint venture (JV) for city gas distribution with Vadodara Mahanagar Sewa Sadan (VMSS).
The venture would have an authorized share capital of Rs 100 crore and GAIL would own a 26% stake through its subsidiary, GAIL Gas Ltd. VMSS would hold a 24% stake and the rest would be held by strategic partners and financial institutions.
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That’s positive for the company, although it may not be a significant development. Total capital expenditure for the proposed JV in the first five years is about Rs 150 crore and about Rs 170 crore would be invested for its further expansion.
GAIL’s shares have underperformed the BSE-100 Index of the Bombay Stock Exchange since the company announced its December quarter financials, which were below expectations. The December quarter results were mainly affected due to the poor performance from its petrochemicals business.
Expectations from the March quarter are not rosy either, with many analysts expecting the company to report flat transmission volumes on a sequential basis. Further, crude oil prices have remained high during the March quarter, thanks to the political tensions in West Asia and North African regions. Higher crude prices translate into a higher subsidy burden.
Since GAIL is one of the companies that share the subsidy burden, its subsidy share is likely to be higher in the March quarter. Analysts expect GAIL’s subsidy burden during the period to be around Rs 800 crore. Better transmission tariffs and petrochemicals margins should offset the impact of the burden in the March quarter to some extent.
Although most analysts are positive on the long-term prospects of the stock, near-term upsides may be limited. Slower ramp-up in the domestic gas production is one of the main concerns for GAIL and news flow from Reliance Industries Ltd (RIL) regarding gas production is not giving much comfort at the moment.
“We estimate GAIL’s FY12E EPS (earnings per share) to decline by 7.5% in case of 5% reduction in volumes,” said analysts from Brics Securities Ltd. The shortfall in RIL’s gas production is, however, expected to be partly compensated by regasified liquefied natural gas, which would augur well for the company.
Graphic by Paras Jain/Mint
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