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Gas Authority of India Limited
Overweight
GAIL.BO, GAIL IN
3QFY11: Robust volume growth; Re-iterate overweight
• Headline 3Q net profits robust, Ebitda a tad disappointing: GAIL
reported strong growth in 3Q headline net profits at Rs9.68bn (up 13%
y/y, 5% q/q), ahead of our estimates on robust volumes and gas trading
revenues. While petchem earnings dragged down Ebitda, we expect 4Q
to be better. With Phase I expansion of the Dahej Vijaipur pipeline ready
and further strengthening of the HVJ network likely in the coming
quarters – capacity constraints are easing. Maintain Overweight rating.
• Volumes remain robust: GAIL averaged volumes of 120.2mmscmd
through the quarter, higher than our estimates, with a resumption of
production at the PMT fields combining with higher spot volumes.
Transmission margins appeared lower sequentially, as GAIL took the
retrospective impact of the hike in non-priority sector administered gas
price from July 1 on its internal consumption.
• Petchem disappoints: GAIL petchem volumes declined 24%
sequentially due to a production shutdown coupled with lower sales in
October due to lower import prices. Sales have subsequently picked up.
Encouragingly, margins were stable, and did not register a q/q decline.
quarter came in at Rs 4.2bn for the quarter, up from Rs3.5bn last quarter,
as R&M losses mounted due to sustained high crude prices. With govt.
functionaries re-iterating that diesel de-regulation would be a drawn out
process, subsidies would remain a drag on earnings.
• Stock impact: While the stock has outperformed the market over the
past quarter, we expect continuing volume growth (driven by new
pipeline commissioning and spot LNG cargos) to drive performance.
• Maintain Overweight: We maintain our Overweight rating, and Sep-11
price target of Rs 590. Our price target is 3 stage DCF based, with 8%
interim growth followed by a 3% terminal growth rate. Key risks to our
call are project delays, disappointment in new network tariffs approved
by the PNGRB and weaker than expected petchem margins.
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