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EARNINGS REVIEW
Gas Authority of India (GAIL.BO)
Buy
In line with expectations: Gas volume to rise; petchem to improve
What surprised us
GAIL reported 3QFY11 adjusted net profit of Rs9.7 bn, up 13% yoy and in
line with our expectations. Although sales at Rs83.8 bn were higher than
our estimate of Rs82.3 bn, EBITDA at Rs13.3 bn was below our estimate of
Rs14.6 bn, mainly from higher than expected raw material costs and other
expenditure. Gas transmission volumes were higher than expected at 120
mmscmd vs. 109 mmscmd for 3QFY10. 3Q petchem volume was adversely
affected from maintenance shutdown, implying higher volumes in the
coming quarters. The average transmission tariff for the quarter came in
marginally higher than expected at Rs.905/’000cm vs. Rs.860/’000cm for
3QFY10.
What to do with the stock
owing to its incumbent national network and strong balance sheet that can
support robust growth initiatives, in our view. Apart from GAIL being a key
beneficiary of the structural theme of rising gas volumes (domestic and
imported) in India, we believe GAIL’s stock price does not reflect the: 1)
likely bottoming out of the petchem cycle in CY11E, and 2) any value for
subsidiary GAIL Gas, which we believe, will emerge as the largest city gas
company in India and could conservatively have EV of US$7bn by FY15E.
We maintain our Buy rating on GAIL with a DCF-based 12-m TP of Rs585,
implying potential upside of 22%. GAIL also offers FY12E dividend yield of
2.5%. Key risks include execution delays and higher subsidy burden
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