Reduce GAIL, target of Rs 342: Angel Broking

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Angel Broking has come out with a research report on GAIL . The research firm has downgraded the stock from neutral to reduce, with a target price of Rs 342/share, in its report dated November 6, 2009.

"We believe that GAIL's performance will continue to hinge on key variables such as Petrochemical Margins and the Subsidy burden borne by it. Over the last few years, the company's commodity business has been key driver of growth in overall profitability. Importance of the commodity businesses (Petrochemical and LPG and Liquid Hydrocarbon Segment) can be gauged from the fact that it has been contributing 40-50% to GAIL's EBITDA in recent years. In view of subdued oil prices and addition of significant gas-based petrochemical facilities in the Middle East, we expect GAIL's Petrochemical Margins to be under pressure going ahead. Moreover, Margins are likely to be under pressure following the increase in LNG prices. LNG price contracted with Rasgas is likely to increase on account of alignment with JCC prices. On the Policy front, potential APM gas price hike would also lead to pressure on GAIL's Profitability in the Petrochemical and LPG & Liquid Hydrocarbon Segments. Further, a relatively higher Subsidy burden would prove to be a key drag on the company's profitability from the LPG and Liquid Hydrocarbon Segment. Growth in Transmission Volumes on account of KG-D6 and incremental gas from Petronet LNG are likely to cushion fall in profitability going ahead. However, prospects for the Segment largely depend on the tariff outlook going ahead. Currently, we are factoring 8-10% decline in tariffs on existing pipelines going ahead. Pending clarity over the same, we maintain our estimates. However, if the regulator determines GAIL's tariffs at higher than our estimate, it would present an upside risk to our valuation", says Angel Broking.

The report says, "At the CMP of Rs 371, the stock is available at 13.5x FY2011E EPS of Rs27.5 and 2.4x FY2011E P/BV, which is at the higher end of the historical valuation band. We downgrade the stock from neutral to reduce, with a Target Price of Rs342/share. Overall, we believe that the risk-reward ratio associated with investment in the stock is not very favourable at the current juncture."

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