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Gas Authority of India Limited Overweight
GAIL.BO, GAIL IN
Strong 2QFY11, Re-iterate Overweight
• Strong 2Q results, maintain OW: GAIL reported strong 2Q profits of
Rs9.2bn (up 29% y/y), ahead of our estimates on robust volumes and
resilient petchem earnings. We maintain our Overweight rating.
• Volumes remain robust: GAIL averaged stable volumes of
115mmscmd through the quarter, despite the shutdown at the PMT fields
affecting domestic output. GAIL has signed a contract with Marubeni to
bring in 0.5mmtpa of LNG starting Jan-11, which would provide further
visibility of volume growth.
quarter, as sales volumes grew 22% sequentially, and margins declined
less than anticipated. We adjust our petchem forecasts for FY11 upwards
as a result.
• Subsidies decline sequentially: GAIL’s subsidy payout for the quarter
came in at Rs 3.46bn for the quarter, down from ~Rs4.5bn last quarter,
as the impact of the fuel price hikes flowed through. However, with
govt. functionaries re-iterating that diesel de-regulation would be a
drawn out process, subsidies would remain a drag on earnings.
• Stock impact/earnings changes: While the stock has outperformed the
broader market over the past year, we expect continuing volume growth
(driven by new pipeline commissioning and spot LNG cargos) to drive
performance. We adjust our FY11/12 earnings ~8%/2% due to better
than expected operational performance.
• Maintain Overweight: We maintain our Overweight rating, and Sep-11
price target of Rs590. Our PT is 3 stage DCF based (we use explicit
forecasts till FY15 with 8% interim growth followed by a 3% terminal
growth rate. We assume a beta of 0.8, risk-free rate of 8.0%, market risk
premium of 6.0%, and cost of debt of 9.0% to arrive at a WACC of
10.4%. Key risks are project delays, disappointment in new network
tariffs approved by PNGRB and weaker than expected petchem margins.
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