Goldman Sachs:: Gas Authority of India: Preferred among state owned companies; off C-List, retain Buy

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Gas Authority of India (GAIL.BO): Preferred among state owned 
companies; off C-List, retain Buy  

Source of opportunity
We increase our 12-month target price to Rs585 (implying 17% potential
upside) from Rs570 earlier to reflect our estimate of a better than
previously expected performance for the petrochemical segment. We
take GAIL off the Conviction Buy list as we now see better upside in RIL.
We believe GAIL is the best positioned company in the Indian gas space
owing to its incumbent national network and strong balance sheet that
will 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 the GAIL stock price does
not reflect the 1) likely bottoming out of the petchem cycle in CY11, 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 based on our estimates.

Catalyst
1) new pipeline capacity coming onstream by Apr’11, 2) rise in gas
volumes through imported LNG even if RIL does not ramp-up
production in FY12, 3) GAIL Gas likely emerging as a big winner in the
city gas auctions in 1HFY2012, 4) likely petrochemical cycle recovery in
FY12.
Valuation
Our new DCF-based 12-m TP for GAIL implies potential upside of 17%
from current levels. We have not included any value for GAIL Gas in our
base case valuation for GAIL, which we estimate could have an EV of
US$7bn using conservative Asian peer group valuations. Therefore, we
find that GAIL Gas could potentially add an additional Rs200/share to
our valuation of Rs585/share for GAIL.  With more auctions of
Geographical Areas (GAs) by the Indian gas regulator, and emerging
clarity of GAIL Gas’ capex and roll out plans in the city gas business in
the coming quarters, we believe we will need to start reflecting some
value for GAIL Gas in our base case assumptions for GAIL.
Key risks
1) Delay in pipeline projects leading to delay in volume ramp-up, 2)
weak petrochemical prices, and 3) higher subsidy burden.