GAIL-: Robust 2Q, Expect a Stronger 2H; Buy -- Citi

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GAIL (GAIL.BO)
Buy: Robust 2Q, Expect a Stronger 2H; Revise TP to Rs550
 In-line quarter — 2Q PAT of Rs9.24bn was in line with estimates, driven by an
increase in gas transmission EBITDA despite lower vols, which more than offset
the impact of weaker petchem and a higher subsidy than originally envisaged.


 New, higher tariffs start kicking in — GAIL reported a surprising 11% qoq
increase in gas transmission EBITDA vs. our expectation of a marginal decline and
despite lower vols of 114.9 mmscmd vs. 116.2 in 1Q (PMT shutdown impact).
This was a result of higher vols (c5 mmscmd) being transported through its
Vijaipur-Dadri expansion (GREP upgradation) commissioned in 1Q (two-phase
expansion – from 20 to 40 mmscmd in phase I which was completed in Apr, and
from 40 to 80 in phase II, which is ongoing). As per new tariffs approved by
PNGRB, tariffs on the DVPL/GREP upgradation are >2x those on existing HBJ
network. This led to avg realisations increasing from Rs789/tcm in 1Q to Rs882.

 Raise TP to Rs550 — We raise our TP to Rs550 (Rs515 earlier) as we roll forward
our DCF to Mar-11E and raise our FY11-13E earnings by 2-6% driven by modest
changes to our volume and subsidy assumptions (Figure 4).

 Reiterate Buy — GAIL remains one of our top picks in the sector, offering one of
the most attractive long-term opportunities for investors in India’s rapidly
developing natural gas space. In the near term too, we see triggers in the form of a
pick-up in transmission vols, led primarily by resumption of PMT and increase in
spot LNG imports. With KG gas production remaining flat in the near-term, GAIL
has already increased its LNG imports in the current quarter, besides signing a
0.5 MMTPA 3-yr LNG contract (w.e.f. Jan 11). The likely commissioning of the
Dabhol terminal too (by 4QFY11E) will boost its LNG volumes. In addition, GAIL’s
new pipeline capacities start coming on stream over the next few months, with
~54 mmscmd to be added by Apr-11E (DVPL/GREP expansion), of which ~11
mmscmd is expected to be added shortly through compressors.