Buy GAIL India; target of Rs 505: Arihant capital markets

“GAIL reported 34.7% yoy jump in 3QFY12 topline to Rs 11294cr largely on account of higher natural gas (NG) sales volumes and realisation. NG volumes during the quarter jumped 2.4% yoy and realisation grew 35% yoy and 21% qoq. Consequently, NG trading revenues grew 38% yoy and 23% qoq to Rs 8269cr. Similarly, Pet-chem and LPG business reported good performance as revenues grew 53% and 33% yoy to Rs 868cr and Rs 966cr respectively. Natural gas transmission business however reported revenue growth of 6.5% yoy, while LPG transmission business reported de-growth of 6.2% yoy during the quarter. GAIL’s subsidy burden during the quarter stood at Rs 536cr against Rs 418cr in 3QFY11 and Rs 567cr in 2QFY12.”

“GAIL reported marginal dip in operating margin yoy at 16%. However on sequential basis margins declined 130bps on account of higher proportion of imported NG volumes. On segmental basis EBIT margins of NG transmission business dropped 620bps yoy to 74% (80%) and that of LPG transmission business dropped 85bps to 74% (75%). Improvement in margins of gas trading (up 46bps) and Pet-chem (up 780bps) business has arrested significant drop in operating profit. GAIL reported 3QFY12 net income of Rs 1091cr against Rs 968cr last year, posting growth of 12.8% yoy. Effective tax rate during the quarter was at 32% compared to 28% last year.”

“GAIL has a diversified businesses, hence we have valued it on SoTP basis and arrived at a valuation of Rs 505/share of which Rs 253/share is contributed by core transmission & natural gas trading business and Rs 84/share by Petchem, LPG & OLHS business. We value investments at Rs 82/share and Myanmar E&P block at Rs 17/share. At CMP of Rs 370, the stock is trading at 12x and 10x of FY12E & FY13E earnings. We recommend Buy on the stock with a Price Objective (PO) of Rs 505 (intrinsic value) representing a potential upside of 36% over a period of 12 months,” says Arihant capital markets research report. 

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