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EARNINGS REVIEW
Gas Authority of India (GAIL.BO)
Buy
Above expectation: Gas volume to rise, petchem margin to improve
What surprised us
GAIL reported 2QFY11adjusted net profit of Rs10bn, up 41% yoy and
above our expectation of Rs9bn, primarily driven by higher transmission
tariffs and marketing margins. Although sales at Rs81.3bn was higher than
our estimate of Rs72.6bn, EBITDA at Rs14.6bn, was inline with our
estimate, mainly from higher raw material costs. 2Q petchem volume was
adversely affected from maintenance shutdown, implying higher volumes
in coming quarters. The average transmission tariff for the quarter came
in higher than expected at Rs.927/’000cm vs. Rs.870/’000cm for 2QFY10.
What to do with the stock
This is the second consecutive quarter in which GAIL’s earnings have
surprised on the upside, in our view. We believe GAIL is the best
positioned company in the Indian gas space owing to its incumbent
national network and strong balance sheet that will support robust growth
initiatives, in our view. Apart from GAIL being a key beneficiary of the
structural theme of rising gas volumes (domestic and imported) in India,
we believe GAIL’s stock price does not reflect the 1) likely bottoming out of
the petchem cycle in CY11E, and 2) any value for subsidiary GAIL Gas,
which we believe, will emerge as the largest city gas company in India and
could conservatively have EV of US$7bn by FY15E.
We maintain our Buy rating (on Conviction list) with a DCF-based 12-m TP
of Rs570, implying potential upside of 17%. GAIL also has FY12E dividend
yield of 2.4%. Risks include execution delays and higher subsidy burden.
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