The key reason is capped gas output of Reliance. But GAIL has a few options up its sleeves to get growth going

Gas Authority of India Ltd (GAIL) is the only gas stock that has not been outperforming over the last month or so largely because Reliance Industries has capped its gas production. GAIL's latest analyst meet provides some clues to its future performance. Moneylife had said on 17th July that gas stocks could outperform because Section 16 of the PNGRB Act of 2006 which was notified from 15th July gives PNGRB authority to issue distribution rights to companies retailing CNG for automobiles and piped cooking gas to households, speeding up this process all over India.

Since then, Indraprastha Gas has moved from Rs293 to Rs305, Gujarat Gas from Rs302 to Rs320, and Gujarat State Petronet from around Rs100 to Rs110. Only GAIL has stayed at around Rs450.

One obvious explanation of this performance is that it is already trading at premium valuations and that RIL unexpectedly capped its gas production for this year. However, in its analyst meet, GAIL laid out a strategy to get around this hurdle. It is now banking on higher gas pipeline throughput by importing 2-3 spot LNG cargoes/month. Besides this it also said its capex plans are on track - it is investing huge amounts in pipelines over the next three years, doubling the capacity of its petrochemicals plant in Pata (Uttar Pradesh), is planning to enter city gas distribution (CGD), and has made investments in the power sector.

Biggest driver: Gas transmission

In the short- to medium-term, GAIL believes that global LNG markets will be oversupplied. Additionally, the Indian market is facing a shortage with RIL capping its KG DG gas production. GAIL plans to take advantage of this situation by buying 2-3 cargoes on the spot market and increasing its gas transmission volumes. It is confident that it will find buyers for LNG, even if it proves a little expensive. GAIL plans to route these extra volumes through PLNG, Shell Hazira, and later through the Dabhol terminal which is expected to start in Q4FY11. Petronet LNG will be a huge beneficiary of GAIL's plans of importing ~25 spot cargoes in a year which could translate into ~1.5 MMTPA of re-gasification volumes for Petronet.

Capacity expansion: Aggressive and on track

GAIL plans to invest close to Rs300 billion between FY11 and FY13 - of which 67% is on pipelines, 6% on exploration and production (E&P), and 9% on petrochemicals. To fund this, it has plans to borrow Rs154 billion over FY11-13 of which term loans could be 31%, bonds 31% and external commercial borrowings. The company has a low D/E ratio of 0.08:1, which may allow it to get cheaper loans.

A quick snapshot of its seven key pipeline projects

* DVPL phase II, 610km, Rs52 billion (to be complete in April 2011)
* Vijaipur Dadri, 505km, Rs57 billion, April 2011 (partially complete)
* Dadri-Bawana-Nangal, 646km, Rs24 billion, April 2011 (partially complete)
* Chainsa-Jhajjar-Hissar, 349km, Rs13 billion, April 2011 (partially complete)
* Jagdishpur-Haldia, 2,050km, Rs76 billion, phase I - March 2012; phase II
January 2013
* Dabhol-Bengaluru, 1,389km, Rs50 billion, phase I - March 2012, phase II
December 2012
* Kochi-Mangalore-Bengaluru, 1,114km, Rs33 billion, phase I - March 2012,
phase II - December 2012.

GAIL is doubling the capacity of its petrochemical plant at Pata to 900 KTPA in 42 months (first phase of 500KTPA in Q4FY11 from 420KTPA currently).

In the E&P segment, GAIL is commercially producing crude oil from the Cambay basin and expects its generating blocks to a total of three by FY14 (27 blocks of which eight are onshore, 18 offshore, and one is a coal-bed methane block).

While GAIL is not a serious player in the power segment, it has made a few exploratory investments. It has a stake in Reliance Gas Transportation Infrastructure Ltd for its 1,600MW power plant, a stake in Gujarat State Petroleum's power plant, a wind energy plant at Bhuj, and has plans to set up small power plants along the Dabhol-Bengaluru pipeline.

Among all of GAIL's future plans, it is possible that the importing spot LNG cargoes will give the stock a fillip in the near term while the expansion of its gas pipeline network and its petrochemical expansion will a be good long-term driver