Recommendation From Oil Drilling & Exploration Sector

This section gives a recommendation of a stock having stock price below Rs 100 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

GAIL (INDIA) LIMITED

FLYING HIGH ON GAS

HERE IS WHY 
Good sectoral growth prospects. 
Dominant market position. 
Government’s focus on the industry

GAIL (India) Limited (GAIL) is an integrated natural gas company, with a presence in transmission, gas processing, and downstream petrochemicals. Apart from these businesses, GAIL also has interests in the liquefied natural gas (LNG) business and in city gas distribution projects both in India and overseas. It has a good market position in many verticals. It supplies natural gas to around 60 per cent of the country’s piped natural gas (PNG) connections. The company is currently authorised to operate in 62 geographical areas throughout India, including several metro cities. These city gas distribution (CGD) networks together cater to around 62 per cent of the total domestic PNG connections in the country. GAIL also operates more than 64 per cent of India’s CNG stations through alliances. Out of the total 1,730 CNG stations in the country, the company operates 1,114 CNG stations. It also has a dominant share of around 70 per cent in natural gas transmission market in India too by virtue of its large pipeline network covering approximately 12,200 km. The setting up of pipelines requires large investments and navigating a complex regulatory framework. As a result, the entry barriers to the natural gas transmission business remain high. This will insulate GAIL from threat of new entrants. The company contributes nearly 60 per cent of natural gas sold in India. It is now expanding its global presence through participation in ventures along the natural gas value chain. With an LNG portfolio of around 14 MMTPA from the US, Qatar, Australia, etc., it has emerged as one of the leading global LNG players and is actively involved in LNG trading business in the international market.Natural gas is a booming sector in India. 

As per the recent budget, there are plans to expand the national gas grid to 27,000 km from the present 16,200 km. Besides, the city gas distribution projects are expected to grow. The share of natural gas in India’s energy basket is only 6.2 per cent as against global average of 23.4 per cent. The government plans to increase it to 15 per cent over the next decade. GAIL is a vital part of the central government’s vision of expanding the share of natural gas in the energy basket of India.

GAIL has high dividend yield and a healthy dividend payout ratio. The company’s debt has also been reducing in the past three years. It has seen improving return ratios, with RoCE increasing to 20.03 per cent in FY18-19 from 13.90 per cent in FY16-17. In the recent quarter, the company saw better margins in gas marketing and liquid hydrocarbons (LHC).During the quarter, the company saw volume growth in gas transmission, gas trading, LPG transmission and LHC businesses. On a consolidated basis, net sales reduced 11.52 per cent YoY to Rs17,898 crore in Q3FY20 from Rs20,229 crore in Q3FY19. Its operating profit saw a decline of 19.18 per cent to Rs2,367 crore in Q3FY20 from Rs2,929 crore in Q3FY19. Net profit stood at Rs1,015 crore in Q3FY20 as against Rs1,638 crore in the same quarter last year, showing a decline of 38.04 per cent. Even though these quarterly numbers have slipped down as compared to last year, the recent developments in the gas industry and the improving margins will help the company in the future. By virtue of these factors, we recommend our readerinvestors to BUY this stock.