Piped Piper

Piped Piper
Natural gas has surfaced as one of the most favoured fuel in recent times thanks to its environment-friendly nature, cost effectiveness and higher efficiency.

According to EIA International Energy Outlook estimates, India’s natural gas consumption is expected to touch 78.4 billion cubic meters in 2025 from 25.2 billion cubic meters in 2002. Currently, India’s demand for natural gas exceeds supply by a wide margin.

Given this, one of the companies that will benefit from the scenario is Gujarat State Petronet (GSPL). GSPL, a subsidiary of Gujarat State Petroleum Corporation, is engaged in transmission of natural gas and develops infrastructure for transportation of energy with the intention to bridge the gap between natural gas supply sources and the demand markets.

Analysts believe that GSPL’s present valuations have not factored in the additions to GSPL’s core transmission business, which currently runs on the Panna-Mukti-Tapti (PMT) gas fields. Reliance KG gas will be added to GSPL’s core transmission business in the next six months along with two additional gas fields, Gujarat Petroleum KG fields in 2010 and ONGCs KG fields in 2012.

Positive triggers for the stock include the commencement of incremental supply of 4.8 mmscmd of gas from the PMT fields in April 2008 and commencement of Reliance Industries’ gas production from mid-2009. Further, GSPL’s pipeline expansion plans will take it pipeline to 2,200-2,400 kms over a period of three years from the current 1,130 kms. Its association with Reliance Industries too, augurs well for GSPL. Both the companies are expected to share each other’s pipeline for transmission of gas without creating any sort of overlapping.

Analysts believe that GSPL has a stronger revenue model than GAIL, which is a leading Indian gas transmission and distribution company. One of the main reasons being that GAIL’s tariffs are determined by Tariff commission appointed by the government while GSPL operates as an open carrier with a take or pay agreement with its customers. Also, GAIL with its pipeline network of Rs 2,000 kms commands a market capitalization of Rs 40,553.15 crore while GSPL; with a pipeline network of 1,130 kms has a market capitalisation of Rs 4,997.74 crore.

For the quarter ended September 2007 (Q2), GSPL posted an increase of 25.7% in its revenues compared with the same period last year to Rs 95.36 crore. However, GSPL’s net profit for Q2 saw a decline of 27.3% to Rs 16.28 crore thanks to an increase of 105.7% in interest costs.

Gujarat State Petronet (GSPL)’s stock has out performed the broader Sensex and has appreciated by 134.5% in the past one-year. The stock has found favour as a long-term buy among analysts.

Cane and unable
The country is expecting a massive production of over 30 million tonnes of sugar (demand stands at around 20 million tonnes) in the sugar season of 2007-08. Rising cane prices (key raw material for producing sugar) and weak sugar prices in the domestic and global markets have already caused local sugar companies to bleed.

Given this, one of the steps, which the government intends to take to improve the situation is to consider an extension of the export subsidies given to sugar companies by another year. The current export subsidies end in April 2008. Another move which the government is considering is to increase the threshold limit for ethanol beyond 10% condition being that the industry can provide the required supply on a long-term basis. Currently, India (except Jammu & Kashmir and few others) blends 5% ethanol with petrol on a mandatory basis. From October 2008 onwards, ethanol blending with petrol will increase to 10% on a mandatory basis.

But the million-dollar question is whether these proposed steps would assist sugar companies become profitable again? Well, the answer seems no. The reasons for this are not unknown. Global sugar prices are on a par or lower in some cases than the domestic markets. Needless to say that this renders Indian sugar prices uncompetitive in the global arena. When it comes to ethanol, analysts maintain that demand is much lower than the molasses (from where ethanol is produced) produced in the country. Further, restrictions on free movement of ethanol across different states and taxation & pricing issues have led to oil-marketing companies pick up lower quantity of ethanol.

There is no doubt that the proposed steps will help sugar companies minimise their losses but it is unlikely to put them in a profitable position.

Analysts anticipate that the estimated production of 30 million tonne for the current sugar season 2007-08 will see a slight drop, as sugar mills in Uttar Pradesh have delayed their crushing. Though this will not lead to production below the anticipated demand of around 20 million tonnes.

In the past one-week, stocks of sugar companies have been showing a rising trend. This was on the back of expectations of favourable judgment of the High court on state advised price (SAP) in Uttar Pradesh, which was higher than what the court had set. The court passed its judgment and has asked the UP government to reassess the SAP in the next three months. The court also declared that all the notifications/ circulars/ letters declaring SAP stand cancelled. Though, this augurs well on a short-term basis, the fundamentals remain bleak given the expected surplus situation in 2007-08.