Brokerage house Credit Suisse has downgraded its rating on oil marketing company GAIL to ‘underperform’ due to a significant fall in liquefied natural gas (LNG) demand and deterioration in its gas trading business.
Credit Suisse has a new target of Rs 320 for the stock.
“Rasgas prices are linked to 60-month average oil, and are elevated,” says the Credit Suisse report, adding that the issues were likely to persist for a while.
Excerpts from the report:
● Chemical capacity expansion can only add to troubles. The govt's policies on subsidies for power and gas pooling for urea may assure some volumes for GAIL, but the company may have to forego some margins in compensation. Even with an elimination of subsidy payments, GAIL's PAT can decline YoY in FY15/16.
● GAIL's contracts to purchase 5.8 MT of HH gas, and the sale of that in India was expected to provide large earnings growth. That upside is now at risk. Even at $80/bbl oil, savings from using HH linked gas in India will be marginal at best now. There is risk GAIL may be forced to pay unutilised take-or-pay charges on LNG capacity.
● GAIL has appeared inexpensive on a discounted cash flow (DCF) on back-ended volume growth. With increasing risks to those forecasts, near term earnings concerns may matter more.
(Posted by Ritika Dange)
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