Gail - Strong 1H growth on low base:: BofA ML

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Gail India Ltd.
Strong 1H growth on low base;
2H growth lower on high base

􀂄 2Q profit up 29% YoY and 1H up 32% YoY on low base
Gail’s 2Q FY11E profit is up 29% YoY driven by a rise in LPG and gas
transmission EBITDA. Its 1H profit is 32% YoY higher. The strong rise in 1H and
2Q FY11E profit is on the low base of 1H FY10 profit. 1H FY10 profit was 23%
lower than 2H. We have raised Gail’s PO by 7% to Rs430/share from Rs402. The
new PO implies 12% potential downside. We therefore retain our Underperform
rating on GAIL.



Weak profit rise likely in 2H FY11E on high base
Gail’s 2H FY11E profit growth is likely to be modest on the higher base of 2H
FY10. We keep our FY11E profit, estimate implying 18% YoY potential growth,
unchanged.

2Q profit growth driven by gas transmission & LPG
Gail’s 2Q profit rise of 29% YoY is driven by a 23% YoY rise in gas transmission
EBITDA and Rs2.5bn YoY jump in LPG EBITDA net of subsidy. Gas transmission
EBITDA has been driven by an 8% YoY rise in transmission volumes and
marketing margin permitted on APM gas since June 2010. Gross LPG EBITDA
before subsidy in 2Q is up 34% YoY driven by 56% YoY jump in realization. 2Q
FY11E LPG EBITDA net of subsidy is Rs1.9bn vis-à-vis loss at EBITDA level of
Rs510m in 2Q FY10. Gail’s 2Q FY11E subsidy is 24% YoY lower.

Raising PO by 7% to Rs430 on rollover to FY12E
We have raised Gail’s PO by 7% to Rs430/share from Rs402/share due to the
upgrade in the value of its core business and the upgrade in the value of its
investment in ONGC, Petronet LNG, Indraprastha Gas and China Gas. The value
of its core business is up to Rs355 from Rs335 earlier and value of investments is
up by 12% to Rs75. The core business value upgrade is driven by roll over of
LPG and petrochemical business valuation (EV/EBITDA) to FY12E.