GAIL India-- New volumes come at higher tariffs:: Macquarie

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GAIL India
New volumes come at higher tariffs
Event
 GAIL India announced 2Q EBITDA of Rs14.5bn (up 40% YoY), in line with
expectations. On a QoQ basis, a lower subsidy burden and lower dry well
expenses were offset by higher deferred taxes and weaker petchem/LPG
realizations to yield a 4% increase in the bottom line. We reiterate our
Outperform, with an increased TP of Rs563/sh (from Rs548).


Impact
 Transmission volumes increase 7% YoY, flat QoQ: With the decline due to
Panna-Mukta-Tapti shutdown being made up for by additional spot LNG
imports, gas transmission volumes remained stable QoQ at ~115mmscmd.

 Regulatory upside comes through fully: GAIL’s natural gas transmission
EBIT jumped 38% YoY and 13% QoQ; the QoQ jump was due to a 10%
increase in blended tariffs, which resulted in EBIT margins expanding by 3%.
Similarly, the natural gas trading segment EBIT rose by 1% QoQ despite a
decline of 7% in trading volumes due to the full effect of the allowance of
marketing margins on APM gas coming through in the quarter.

 Subsidy burden at Rs3.46bn; lower dry-well write-offs: GAIL shared a
higher-than-expected 9.4% of the upstream burden of one-third of total underrecoveries.
The impact of the increased share for the quarter (vs 6.8% in 1Q
FY11), however, has been more than offset by reduced overall underrecoveries
(from Rs200bn in 1Q to Rs110bn in 2Q) due to gasoline
deregulation and increased prices for other subsidised fuel halfway through
the last quarter. Also, dry-well expense for the quarter was lower at Rs0.49bn
(vs much higher Rs2.0bn in 1Q FY11).

 Low realizations drag down converter businesses: Petrochemicals EBIT
rose 13% QoQ due to increased sales (22% higher at 107MMT); however,
EBIT margins contracted by 7% QoQ due to weaker realizations. LPG
realizations were down by 3% QoQ but up by 17% YoY.


Earnings and target price revision
 No significant changes in earnings; TP increased to 563/sh from Rs548.
Price catalyst
 12-month price target: Rs563.00 based on a Sum of Parts methodology.
 Catalyst: Clarity on ramp-up of KG-D6 production to +60mmscmd.


Action and recommendation

 A rare low-risk, high-growth combination; switch from Petronet LNG:
GAIL’s earnings are considerably de-risked from declines/shutdowns from
indigenous fields as all of India’s LNG terminals (which supply the balance
between demand and domestic supplies) are linked to GAIL pipelines. GAIL is
an oligopolistic, high-growth utility trading at 3.0x FY11E P/BV, and we expect
it to double its volumes over the next 3–4 years at tariffs that are much higher
than at present. We recommend a switch from Petronet LNG (PLNG IN,
Rs119.00, Underperform, TP: Rs80.00), which faces fluctuations in volumes
and margins of spot cargos and which trades at 3.3x P/BV.