Pre-eminent India gas play: GAIL will retain its pre-eminent role in
India's gas industry with 14000kms of trunk pipelines and 214mmscmd
of gas transmission volumes by FY15E (73% of India total). Based on
preliminary tariff for the HVJ expansion, we estimate Southern network
tariffs will be c.Rs2/scm to support 12% ROCE envisaged in the
regulation. With a judicious use of leverage, we calculate sustainable
ROEs of 20-25% in the gas transmission business which will help
sustain stock performance. We reiterate OW on the stock.
• Core is strengthening…: GAIL’s network expansion over the coming
years will, we forecast, result in gas transmission business accounting
for c.70% of earnings in FY13 v/s c.50% currently. We expect a volume
CAGR of 15% in the expanded Northern network (HVJ/DVPL/GREP)
and in new geographies (south) to underpin the shift in business mix.
• … Though peripherals will continue to drag: Petrochemical margin
outlook continues to be muted, with large capacity additions in CY10.
We expect the polymer cycle to trough over the next 6-12 months, and
build in a decline in petchem contribution and a Rs11-7bn annual
subsidy on LPG sales which will impact medium-term profitability.
• Catalysts, share price drivers: Strong domestic volume growth
visibility and remunerative tariffs on new networks will drive earnings
14% CAGR over FY10-13E, supporting stock performance, in our view.
• Price target, valuation, key risks: Our 3-stage DCF based value for
GAIL is Rs505. We use explicit forecasts till FY15, a 8% interim growth
rate (5 years) and terminal growth of 3%. Including value of investments,
our Sept 11 PT for GAIL is Rs590. Key risk to our rating, PT arises from
project delays, disappointment in new network tariffs approved by
PNGRB, weaker than expected petchem margins.
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