Hold GAIL India; target of Rs 392: Nirmal Bang

“GAIL (India)’s 1QFY13 net profit at Rs11,338mn (up 134% QoQ & 15% YoY) beat Bloomberg/our estimates by 27%/41%, respectively. The earnings got a shot in the arm by across-the-board expansion in realisation, which nullified the impact of lower volume across verticals. We believe the stock’s trajectory depends on: (1) Ability of the company to maintain natural gas transmission volume in times of falling Krishna Godavari Basin-D6 block’s volume, (2) Sustainability of high spot margin in natural gas trading in a supply-deficit market, (3) No substantial increase in upstream subsidy burden, (4) Agility in defending historical EBITDA margin of ~17-18%. We retain our Hold rating on the stock with a revised TP of Rs392 from Rs374 earlier.”

“Revenue in 1QFY13 was up 8.1% QoQ at Rs9152mn, despite a fall in volume to 109.82mmscmd (down 5% QoQ and 6% YoY) on account of declining KG-D6 production. Revenue got a boost from improvement in blended tariff, up 14% QoQ and 4% YoY at Rs916/tscm with increased volume witnessed in higher-tariff new pipelines. Devoid of any legacy factors (provisions and write-offs) EBITDA margin in the natural gas segment increased to 80.7% in 1QFY13 from 58.6%in 4QFY12. Out of 109.82 mmscmd of gas volume, KG-D6 block accounted for ~22mmscmd, APM (Administered Price Mechanism) gas ~52mmscmd and RLNG (regasified LNG)/ others contributed the rest. Given the delay in Dabhol terminal and Kochi pipeline, we lower our gas transmission volume to 114mmscmd/122mmscmd for FY13E/FY14E from our earlier estimates of 118mmscmd/125mmscmd, respectively.”

“GAIL, despite being one of the key beneficiaries of a tight-gas supply market, is unable to get a proper valuation due to: (1) Investors’ fears that in the absence of gas supply (on account of infrastructure constraints) for two years, the new pipelines would be running at a low utilisation rate despite the incurred capex of Rs120bn, (2) Return ratios declining on low revenue growth as well as higher depreciation and interest expenses. We believe the stock’s direction hinges on the company’s ability to arrest falling volume in the medium term (FY13-14) and sourcing of RLNG at the rates which are palatable to Indian consumers. We have increased our FY13E/FY14E EPS estimates by 6%/5% to Rs31.76/Rs33.20 from Rs29.82/Rs31.64, respectively, to reflect: (1) Higher marketing margins, (2) Marginal improvement likely in FY13E/FY14E blended tariff, and (3) Other minor changes,” says Nirmal Bang research report.

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