State-owned natural gas major GAIL India is set to benefit from the increasing LNG capacities of Petronet LNG plants and commencement of production from the KG-D6 field.GAIL straddles the entire value chain from exploration and production to transmission and distribution, to marketing and processing of gas. 

Analysts anticipate gas demand in India to rise substantially in the days to come, breaking with the underutilisation of gas-based capacities in fertiliser, power and other industries.

According to a report dated February 20 by India Infoline, demand is set to witness a compounded annual growth rate of 12.1% between this fiscal and FY12, driven by robust growth in demand from power and fertiliser sector. GAIL, a major player in the space with a market share of about 80%, would gain from the rising gas demand. 

Experts foresee gas prices moving higher if the pricing policy shifts to a market-determined regime. 

Also, GAIL intends to set up city gas distribution (CGD) projects in 20 cities in the next two years, which analysts feel will boost the company's margins. 

A major worry though is the expected pressure on margins in GAIL's petrochemicals business. Global crude oil prices have corrected sharply and major economies are in recession, which would impact demand adversely. Increasing capacity across product categories is likely to put more pressure on petrochemical spreads and prices. The gains from distribution and CGD could thus be offset by the decline in margins of the petrochemical business. The company reported weak numbers for the December quarter, largely under the impact of higher subsidy burden. Revenues grew 35.2% over the same period last year to Rs 5,811.7 crore, but profit after tax fell by a sharp 59% to Rs 253.4 crore. At Rs 200.15, the stock trades at 8.2 times its estimated earnings for 2010.

Since the company derives around 50% of its current profits from the petrochemicals and LPG business, experts foresee muted growth in the next 2-3 years.

However, near-term downsides for the stock appear limited and the company has cash worth Rs 40 per share. Investors could therefore accumulate the stock on declines, with a long-term bias. 

Pallavi Pengonda/ DNA-Daily News & Analysis Source: 3D Syndication