GAIL will have zero-subsidy burden for the rest of the year, but there is no official communication about FY15, so ICICI Securities is estimating Rs 1400 crore as subsidy for GAIL for next year, Rohit Ahuja explains.
State-owned gas utility GAIL India reported 7 percent drop in net profit at Rs 915.67 crore for the July-September quarter versus Rs 985.38 crore in the same period a year ago. Its turnover increased from Rs 11,664.37 crore to Rs 14,224.37 crore in Q2 of 2013-14 fiscal.
The government has capped GAIL's FY14 subsidy bill at Rs 1400 crore, which means that the company will not bear any subsidy burden in the second half of this fiscal year.
Though this may be seen as a possible pre-cursor to no subsidy for GAIL in FY15, Rohit Ahuja of ICICI Securities says it is too early to assume that.
GAIL will have zero-subsidy burden for the rest of the year, but there is no official communication about FY15, so ICICI Securities is estimating Rs 1400 crore as subsidy for GAIL for next year, he explains.
On the other hand, Niraj Mansingka of Edelweiss Financial Services expects GAIL to be out of subsidy net in FY15 on assumption that gas price will be raised to USD 8.4 from the current USD 4.2, which will reduce its subsidy for next year.
However, both experts feel that the government might have reduced GAIL’s subsidy burden this year since gas price for the company escalated to almost Rs 1400 crore as Reliance’s KG-D6 volumes fell.
Meanwhile, Ahuja added that the broking firm has turned positive on GAIL after recent newsflow. Edelweiss also expects a valuation rerating in the stock.
Below is the edited transcript of the interview
Q: Is your call that GAIL is done now for subsidy burden considering that in FY15 we will have a gas price hike that will also kick in?
Ahuja: All we know is that this is only for second half FY14 where we have a official confirmation that subsidy burden is going to be NIL. But if you go by the rationale - subsidy burden was capped on account of increasing gas costs for GAIL. So there is a possibility that it can be NIL for next year, but there is no such official communication on FY15 yet. In our estimates also we have built in Rs 1400 crore number for next year. Possibility is high, but it is not confirmed.
Q: You have now factored in zero subsidy for FY15, would that be right and what kind of rerating can it lead to for a stock like GAIL?
Mansingka: The reason for capping subsidy this year is gas price for GAIL has gone up because Reliance KG-D6 volume went down, which led to increase in cost of GAIL by almost Rs 1400 crore. Because of this, the government might have reduced the subsidy burden for GAIL.
Next year, Administered Pricing Mechanism (APM) gas price is increasing. Also, if one assumes that gas price to rise to USD 8.4 from the current USD 4.2, cost of GAIL increases to an extent of Rs 1350 crore. First of all, we believe that gas prices will be hiked, so increase in gas price in future will lead to reduction in subsidy for next year. Hence, we are going ahead with the assumption of no subsidy for GAIL from next year onwards.
Q: What is your call on GAIL as a stock and what is your estimate for the second half EPS as well as now FY14 total?
Ahuja: Our call on GAIL is positive; we believe it offers good value for long-term investment at current levels. The primary factor in GAIL would be volume growth in the gas transmission business, which has been subdued in the first half. Over the last few quarters, we have seen a continuous decline, which has been in the line of Reliance D6 gas production decline. Now they have Dabhol LNG Terminal which has got commissioned and post monsoon i.e second half, we could see some more volumes from there.
Over the long term we are quite optimistic on the prospects of GAIL because there has been a good jump in their gas trading business earnings over the last few quarters. As more LNG comes into the market, this business will do better eventually in the next three-four years. GAIL for now will be more dependent on ramp up in LNG volumes across India.
We have many gas capacities coming up across India over the next four years. GAIL being in a dominating place in the gas transmission and infrastructure, it would be transporting most of these volumes. They would gain on two fronts, first will be gas transmission infrastructure and to some extent gas trading. It offers a good value pick. As far as earnings estimate go, there would be a good jump in the second half if you go by NIL subsidy assumption. We have estimated about Rs 36-37 for FY14 in terms of earnings.
Q: What is your FY15 EPS targeted at considering that you are not factoring in any subsidy outflow for GAIL and what would your call on the stock be?
Mansingka: We are positive on the company; we have upgraded it to a buy with a target of Rs 400. Our EPS for FY15 is Rs 37.5, FY14 is Rs 35.2. This is a growth of only 6 percent, but we note that there can be rerating on valuations primarily because of this subsidy element going away.
We are not very positive on their transmission business. But valuation rerating can be a larger trigger than negatives on transmission earnings going away because of the ship-or-pay contracts going away in the next year. This is the prime thought process we are carrying while recommending GAIL to our investors.
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