Hurdles in the Pipeline

GAIL, a natural gas transmission company which was started in the late eighties, has grown organically by building large networks of natural gas pipelines covering over 8,500 kms and having a capacity of around 170 mmscmd (million metric standard cubic metres per day). It is India’s largest natural gas transmission and trading company. About 75 per cent of its transmission business and 50 per cent of its trading business is carried within India. Positives Superior margins. The company uses natural gas from the Panna-Mukta-Tapti fields as feedstock for its petrochemical plant. The price of this gas is fixed, which gives the company a high operating leverage. The bottom line of its petrochemical business is affected mainly by an increase or decrease in the international price of polyethylene (a key output). The company’s petrochemical business also enjoys a cost advantage vis-à-vis rivals: the cost of the gas that it uses is less than one-third the cost of the naphtha that other petrochemical producers use. Hence, GAIL enjoys superior EBITDA margins of around 45-50 per cent while its peers have an EBITDA margin of barely 15-20 per cent. According to a report from Ambit Capital, the availability of low-cost gas supply for the ongoing expansion at Pata (where the company plans to double its capacity) and expectation of strong polyethylene prices will sustain its positive margins. Assured returns. GAIL has five approved but unbuilt pipelines. According to a report by Edelweiss Securities, these pipelines have been assured a post-tax return on capital of 12 per cent with uncapped leverage. The as