Motilal Oswal neutral on GAIL India

Motilal Oswal has maintained neutral rating on GAIL India with a target of Rs 395, in its July 31, 2012 research report.

“GAIL India's EBIT for 1QFY13 was INR17.8b (higher than our estimate of INR14.2b), primarily due to lower subsidy sharing at INR7b (v/s estimate of INR10.9b). Reported PAT was up 15% YoY and 135% QoQ at INR11.4b. Pre-subsidy, overall EBIT was in-line at INR24.8b (up 15% YoY and 24% QoQ). The higher than estimated gas trading EBIT (INR5b v/s our estimate of INR2.8b) was compensated by lower than estimated petchem EBIT (INR2b v/s our estimate of INR4.2b). Gas trading EBIT was boosted by one-time gain of ~INR2b, led by higher spot LNG sales coupled with benefit of higher realization and rupee depreciation. Petchem EBIT was impacted by lower sales volume due to capacity shutdown. As it carried very low inventory towards the end of 4QFY12, sales volumes (66kt) were lower than production volumes (80kt). Gas transmission EBIT was higher at INR5.7b (v/s our estimate of INR5.2b) on account of higher tariff at INR916/mscm (v/s our estimate of INR871/mscm), as more gas flowed in zone-4, partially offset by lower volumes at 110mmscmd (v/s our estimate of 114mmscmd).”

“We expect GAIL's earnings to remain flat in the medium term, as headwinds on incremental gas availability continue. We model transmission volumes of 114/121mmsmcd in FY13/14. Adjusted for investments, the stock trades at 8.4x FY14E EPS of INR32.9. Our SOTP-based fair value estimate is INR395/share. We have a Neutral rating due to: (1) low near-term visibility of transmission volume growth, (2) lower return ratios in the near term due to under-utilization of new capitalized pipelines, and (3) adhoc subsidy sharing risk,” says Motilal Oswal research report.  

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