Nomura research: Buy GAIL

Capacity woes to end soon
 HVJ constraints – Easing to begin soon
After rising by nearly 40% over March-December 2009, GAIL’s gas
transmission volumes remained stagnant at 115-118mmscmd over
the past nine months, due mainly to bottlenecks at its key HVJ
network. We expect this to change soon, as GAIL first de-bottlenecks
old Dahej-Vijaipur pipeline (by end 2010) and then commissions a
new 48” Dahej-Vijaipur pipeline. We expect average transmission
volume growth of 13% in FY11F and a further 17% in FY12F.
 Increasing visibility for longer-term volume growth
GAIL recently commenced work on several key pipelines such as
Kochi-Bangalore/Mangalore and Dabhol-Bangalore. These pipelines
will link upcoming LNG terminals at Kochi and Dabhol, and will
approach largely untapped demand centres in the key southern states
of Kerala, Tamil Nadu and Karnataka, apart from Maharashtra.
 No escape from subsidy woes
GAIL is not an upstream producer (gets limited upside from increases
in liquid hydrocarbon prices); yet, it has to bear the subsidy burden
with upstream players. The Kirit Parikh Committee report, although
silent on GAIL, seemed to suggest that only ONGC/OIL should share
the upstream burden. The government is yet to act on this
recommendation, and we believe it is highly unlikely that GAIL will be
spared. Subsidy payouts will keep limiting GAIL’s LPG segment
earnings, in our view.
 Maintain BUY
Although there are short-term concerns on pipeline bottlenecks and
subsidy issues, we continue to like GAIL for long-term operational
upsides. Early removal of current bottlenecks on HVJ is critical for gas
transmission volume growth to resume. We maintain BUY