Officials of GAIL (India) Ltd, the state-owned marketer and transporter of gas, said the company has been awarded the rights to market the entire gas output from Panna-Mukta-Tapti (PMT) fields—jointly operated by Reliance Industries Ltd, British Gas Plc. and Oil and Natural Gas Corp. Ltd (ONGC)—from 1 April.

GAIL currently markets only about 30% of the gas from the PMT fields and would be able to market the entire gas volume from the beginning of the next financial year. In addition, the company would also be able to earn a marketing margin, but analysts say this won’t contribute significantly to the profits.

News reports suggested that the increased volumes and the marketing margin would add substantially to the firm’s revenues and profit, but analysts put the impact on their fiscal year 2009 estimates at between 3% and 6%. What’s more, since the new arrangement hasn’t been officially confirmed by the company, GAIL’s share price has hardly reacted to the news. Instead, the stock is down about 2% since the news became public.

But note that GAIL’s shares have risen over 35% in less than three months on expectations of a large rollout of its city gas distribution business, lower subsidy share this fiscal and the possibility of better utilization of its gas pipelines on the eastern coast. The plethora of gas finds on the eastern coast essentially means that GAIL’s expansion plans make increasing sense. Utilization at the new pipelines will be better than earlier estimates.

What’s more, the share of upstream players such as GAIL and ONGC in subsidy on retail products has come down to 33% this fiscal, from 40% in fiscal 2007. Meanwhile, higher petrochemical prices due to the spike in crude prices also augur well for the firm. In a recent note to its clients, Citigroup Inc.’s research arm noted that the value of cash and investments on GAIL’s books amount to Rs167 per share, which accounts for 40% of the company’s total valuation. While this provides support on the downside, its expansion plans and the possibility of an extensive rollout of the city gas distribution network would act as potential upsides.

Bank shareholding

Foreign investors have significantly increased their shareholdings in Indian banks in fiscal 2007, according to the Reserve Bank of India (RBI) report, Trend and Progress of Banking in India. In fiscal 2006, foreign financial institutions had a share of more than 50% in only one new private sector bank. In fiscal 2007, that number has increased to six. Their share also went up more than 50% in two old private sector banks in fiscal 2007. By the end of the fiscal, foreign financial institutions had more than 30% share in seven out of eight new private banks and three out of 17 old, private sector banks.

Even among public sector banks, the number of banks in which they had zero shareholding fell from 14 in fiscal 2006 to eight in fiscal 2007. In short, foreign investors have been very keen on the Indian banking sector and they have the majority shareholding in most of the new private sector banks. So what makes a bank a foreign bank? Is it an Indian head office, or control by Indians? Or does ownership matter? These are the questions that prompted RBI deputy governor Vittaldas Leeladhar to term HDFC Bank Ltd and ICICI Bank Ltd as foreign banks.

Risk-reward in stocks

Higher returns are accompanied by higher risk. That simple lesson is driven home by a table about the returns from bank stocks in the RBI report.

The data shows that in fiscal 2006, the Bombay Stock Exchange (BSE) Bankex was a big underperformer, giving returns of 36.8% to investors against the Sensex’s 73.7%. The saving grace was that the volatility of bank stocks, defined as the coefficient of variation, was much lower, at 11.8, compared with 16.7 for the Sensex. In fiscal 2007, however, bank stocks outperformed the Sensex, with the BSE Bankex notching up gains of 24.3%, compared with the Sensex’s 15.9%. Over this year, the Bankex’s volatility was higher, with the coefficient of variation at 17.5, compared with 11.1 for the Sensex.

However, in fiscal 2008 (up to 14 November), the Bankex has again beaten the Sensex, giving returns of 72.7%, against the Sensex’s 52.5%, but the difference in volatility this year has been relatively lower, with the coefficient of variation in the Bankex at 13.8 compared with the Sensex’s 12. That seems to point to the market coming around to the view that bank stocks are less risky.

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