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Gas shortage poses threat to GAIL’s capacity utilization

Gas shortage poses threat to GAIL’s capacity utilization
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First Published: Thu, Jun 23 2011. 10 54 PM IST
Updated: Thu, Jun 23 2011. 10 54 PM IST
India’s gas shortage has hit many companies.GAIL(India) Ltd, the country’s largest gas transmission company, is expected to be adversely affected as well. Analysts have raised concerns over the capacity utilization of GAIL’s new capital expenditure in the medium term. The company is in the process of expanding transmission capacity from about 170 million standard cubic metres per day (mscmd) currently to an estimated 300 mscmd or above by fiscal 2014 (FY14).
“Sub-optimal pipeline utilization will put pressure on GAIL’s near-term profitability ratios,” wrote analysts from Motilal Oswal Securities Ltd in a note to clients on Tuesday. The note adds, “GAIL’s gross block is set to increase by 70% in the next two years. However, earnings will be depressed due to non-commensurate increase in revenue as well as due to higher interest and depreciation charge. This will result in low return ratios over the next two-three years.”
For FY12, GAIL has given transmission volumes guidance of 135 mscmd. However, analysts are sceptical about the company meeting that target, given the production issues at the KG D6 gas block. Expectations from Oil and Natural Gas Corp. Ltd’s fields are also not high at the moment.
In short, shortage of gas is likely to play spoilsport for GAIL in the coming days. Another key issue for the company is subsidy payout and the uncertainty surrounding the subsidy-sharing mechanism. The company’s March quarter numbers were adversely affected on account of higher subsidy contribution, as the government increased the share of upstream oil companies in the total under-recoveries of oil marketing companies (OMCs). Under-recoveries are nothing but losses that OMCs make by selling fuel below market rates.
Both these concerns could keep sentiments muted for the stock in the near to medium term.
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First Published: Thu, Jun 23 2011. 10 54 PM IST