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GAIL (India) (GAIL)
Energy
Petrochemicals plays spoilsport. GAIL reported 3QFY11 net income at `9.7 bn
(+12.5% yoy and +4.8% qoq) versus our expected `11 bn. The negative variance was
due to (1) higher other expenditure at `6.2 bn versus our estimate of `4.9 bn, (2) lower
other income at `1.9 bn versus our estimate of `3.2 bn and (3) lower petchem sales
volume. We maintain our ADD rating on the stock noting 13% potential upside to our
12-month SOTP-based target price of `540. Key downside risks stem from (1) higherthan-
expected subsidy burden and (2) lower-than-expected transmission volumes.
Strong operating performance diluted by higher other expenditure, lower other income
GAIL reported 3QFY11 EBITDA at `13.3 bn (+3.5% yoy and -8.5% qoq) versus our expected `14.7
bn. The moderately stronger performance yoy reflects (1) higher gas transmission volumes at
120.2 mcm/d versus 109 mcm/d in 3QFY10, (2) 6.4% higher transmission tariffs and (3) higher
petchem and LPG realizations. This was partly mitigated by (1) lower petchem sales volumes (-
32.5% yoy) and (2) lower LPG and other liquid sales volume (-11.7% yoy). We note that GAIL’s
share of the subsidy burden on upstream companies was 8% in 3QFY11 and 7.7% in 9MFY11
versus 7.6% in 1HFY11.
Our gas volumes estimates for GAIL are achievable in FY2012-13E
We believe GAIL can achieve our gas volumes estimates despite lower-than-expected gas
production from RIL’s KG D-6 block in the near term. We model gas transmission volumes at 129
mcm/d in FY2012E and 149 mcm/d in FY2013E versus 118 mcm/d in FY2011E. We do not see
significant risk to our volumes given incremental gas supply from (1) higher LNG imports by
Petronet LNG and Shell, (2) recovery in gas production from KG D-6 block and (3) start of gas
production from ONGC’s marginal fields. We expect a significant chunk of the incremental gas to
flow through GAIL’s network.
Revised earnings; retain ADD with a 12-month target price of `540
We have revised FY2011E, FY2012E and FY2013E EPS estimates to `29.4, `37.4 and `44.1 from
`29.8, `35.9 and `42.7 to reflect (1) higher share of GAIL in the subsidy-sharing arrangement (-ve
impact) and (2) other minor changes. We retain our ADD rating and fine-tune our 12-month
SOTP-based target price to `540 (`555 previously). We use 12-month DCF valuation to value
GAIL’s gas transportation segment and FY2012E EBITDA to value GAIL’s other segments (LPG
transportation, LPG production and petrochemicals).
Operating highlights. GAIL’s gas transportation volumes increased 10.3% yoy reflecting
higher availability of gas from RIL’s KG D-6 block. The 4.6% qoq increase in transmission
volumes reflects (1) higher spot LNG volumes and (2) unexpected shutdown of Panna-Mukta
gas fields in 2QFY11. LPG and other liquid sales volume at 331,000 tons was lower
compared to 347,000 tons in 2QFY11 and 375,000 tons in 3QFY10. GAIL sold 81,000 tons
of polymers in 3QFY11 versus 107,000 tons in 2QFY11 and 120,000 tons in 3QFY10.
Gas transmission segment. GAIL’s transportation EBIT increased 11.8% yoy to `6.7 bn led
by higher gas transportation volumes and higher transmission tariffs. The 7.6% qoq decline
in EBIT despite higher gas transportation volumes reflects higher gas price for internal
consumption; company has accounted the impact of higher gas price for the past six months
in 3QFY11. GAIL reported gas transmission volume at 120.2 mcm/d versus 114.9 mcm/d in
2QFY11 and 109 mcm/d in 3QFY10; our estimate was 118.3 mcm/d.
Petrochemicals segment. The chemical segment’s EBIT declined 28% qoq and 43% yoy to
`2 bn led by a sharp decline in polymer sales. GAIL’s polymer sales volumes declined 24%
qoq and 33% yoy to 81,000 tons. The management attributed decline in sales of petchem
segment to (1) significantly lower demand in the current quarter and (2) shutdown of plant
for 20 days.
LPG and liquid hydrocarbons production segment. The LPG and liquid hydrocarbons
segment’s EBIT increased 20% yoy to `1.5 bn due to a sharp increase in LPG prices.
Subsidy burden. GAIL’s subsidy burden was at `4.2 bn (`3.5 bn in 2QFY11 and `4.6 bn in
3QFY10) versus our expected `4.1 bn.
Other expenditure. GAIL reported higher other expenditure at `6.2 bn versus `5.1 bn in
2QFY11 despite lower survey expenses and write-off of dry well expenditure at `320.7 mn
versus `492 mn in 2QFY11.
Other income. GAIL reported 3QFY11 other income at `1.9 bn versus our expected `3.2 bn
despite receipt of special dividend of `1.6 bn from ONGC in the current quarter. The
management attributed the lower other income to significantly lower cash balances in the
quarter.
Modest risk from lower gas production from KG D-6 block
FY2012E volumes. We estimate GAIL’s gas transmission volumes to increase by 11 mcm/d
to 129 mcm/d in FY2012E reflecting (1) higher LNG imports by Petronet LNG (+5 mcm/d)
and Shell (+4 mcm/d), (2) higher gas production from KG D-6 block (+9 mcm/d), (3) start of
gas production from ONGC’s marginal fields (+2 mcm/d) and (4) higher gas production from
PMT fields (+2 mcm/d); Panna-Mukta fields were shutdown for over two months in FY2011E.
FY2013E volumes. We estimate volumes at 149 mcm/d in FY2013E which reflects (1)
higher gas production from RIL’s KG D-6 block (+20 mcm/d) and (2) higher LNG imports by
Petronet LNG (+5 mcm/d) and Shell (+4 mcm/d).
Transmission tariffs. We note that GAIL’s pipeline tariffs for the new pipelines (barring DVGREP
upgradation) are yet to be fixed by the regulator and may be adjusted (up) if gas
volumes are lower versus our expectations—the new pipelines operate under regulated
returns (12% post-tax IRR).
The pipeline tariffs fixed for GAIL’s extant HVJ pipeline and DV-GREP upgradation may be
adjusted upwards to compensate for lower gas volumes, when the tariffs are reviewed by
the PNGRB.
Subsidy amount. We model marginally higher subsidy amount for FY2011E, FY2012E
and FY2013E at `18.1 bn, `16.6 bn and `13.3 bn versus `17.5 bn, `15.8 bn and `12.6
bn. The higher figure reflects higher under-recoveries due to higher share of GAIL at
7.7% in 9MFY11 (versus 7.6% in 1HFY11). We assume that upstream companies will
bear one-third of total under-recoveries and GAIL will bear 7.9% of subsidy burden on
upstream companies in FY2011E and 8% in FY2012E onwards.
Gas transportation volumes. We estimate GAIL’s gas transportation volumes for
FY2011E at 118 mcm/d versus 117.1 mcm/d in 9MFY11 and 107 mcm/d in FY2010. The
yoy increase in volumes reflects (1) ramp-up in RIL’s KG D-6 volumes and (2) higher LNG
imports. We model transmission volumes for FY2012E and FY2013E at 129 mcm/d and
149 mcm/d led by increased supply from higher LNG imports and higher gas production
from RIL’s KG D-6 block (FY2013E).
Crude oil and LPG price assumptions. We model FY2011E, FY2012E and FY2013E
crude oil (Dated Brent) price assumptions at US$82/bbl, US$85/bbl and US$85/bbl.
Rupee-dollar exchange rate. We model exchange rate for FY2011E, FY2012E and
FY2013E at `45.6/US$, `45.5/US$ and `44/US$.
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