Anand rathi recommends GAIL - Gas pipeline expansion to fuel growth, initiate with Buy

GAIL
Gas pipeline expansion to fuel growth, initiate with Buy
We initiate coverage on GAIL with Buy and target price of `585 on
14% EPS CAGR over FY11-13e due to doubling of natural gas
pipeline capacity. We expect the low subsidy-sharing burden to
continue. Key stock triggers are commissioning of gas transmission
pipeline and ramp up in gas supply. Further, potential upside to our
target price is likely from higher crude price, freedom from subsidy,
E&P exploration portfolio and CGD business.
 Gas pipeline expansion is on track and would lead to net profit
CAGR of 14% over FY11-13e. GAIL plans capex of +US$6bn over
FY11-13e; of this, two-thirds would be used for gas transmission
pipeline expansion, which would enhance EBITDA share of the
segment to 63% in FY13e, providing stability and earnings visibility.
 Expect lower subsidy sharing. With government asking lower
subsidy payout since the past two quarters, we expect GAIL’s subsidy
share to remain low (~6.5% of upstream share).
 Potential upsides to our target price. i) If GAIL’s subsidy burden
becomes nil, our price target would go up by `125; ii) Boost of
`30/share for every US$5/bbl increase in crude; iii) Another
`30/share from E&P exploration portfolio, iv) CGD business.
 Valuation. Our target price is based on DCF value of the present
businesses, market value of listed investments and BV for other
investments. Downside risks: lower gas transmission tariffs/volumes;
lower petchem margins/volumes; subsidy overhang.