Buy GAIL -Not willing to commit to higher near term volumes; Credit Suisse,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


GAIL ------------------------------------------------------------------------------ Maintain OUTPERFORM
Not willing to commit to higher near term volumes; yet volumes can grow despite flat D6


● GAIL recently signed an MoU with the govt. outlining FY12
volume targets. Natural gas transmission is estimated at 118
mmscmd, down from 3QFY11 and lower than our estimate of 129
mmscmd.
● Given GAIL will be evaluated on these numbers, it is likely to have
been conservative in its forecast (as it was in FY11). Uncertainty
on KG gas volumes would lead to additional caution. Yet GAIL
should be able to grow volumes on the back of additional LNG.
● We reduce our FY12 volume forecast to 123 mmscmd, higher
than GAIL’s estimates, leaving average transmission tariffs at
3QFY11 levels. GAIL should commission its new pipelines soon.
While these can lead to higher depreciation charges, weighted
average tariffs can also increase as a result.
● Indian gas availability should grow long term, securing growth/
returns for GAIL – and its capex programme. At 2.5x fwd book
and 19% RoE, valuations have room to absorb near-term issues.
Higher subsidy payment is the larger near term risk. Our FY12/13
EPS fall 3%/1% to Rs33.3/36.5. TP increases from Rs541 to
Rs.557, principally on rolling forward the DCF. OUTPERFORM.



GAIL signs an MoU with the government
GAIL has signed an MoU with the government of India, setting out
volume targets for FY12 that will be used to evaluate GAIL’s
performance at year end. Most significant among these is GAIL’s
forecast of FY12 gas transmission volumes of 118 mmscmd, lower
than the amounts transmitted in 3QFY11 (120 mmscmd) and
significantly below our estimate of 129 mmscmd for the year.
Given that these will be used to evaluate the company, GAIL is likely
to have been conservative on its forecasts (It has beaten its FY11
target of 114.8 mmscmd in each of the first three quarters).
Uncertainty on growth of KG D6 gas production would lead to
additional caution in predicting volumes. Yet, volumes can grow over
FY11 on higher LNG imports – for underutilised power plants and for
oil refineries. We change our FY12 transmission volume estimate to
123 mmscmd, higher than GAIL’s forecasts.

Update model
We update our GAIL model: 1) reducing FY12/FY13 gas transmission
volume estimates, 2) increasing crude price estimates in line with the
recently-updated CS forecasts, 3) increasing PE price estimates
accordingly, 4) increasing LPG and other hydrocarbon production
volumes as per the MoU and 5) reducing long-term steady state gas
volume estimates in the DCF (FY17 onwards) to account for current
uncertainty in Indian natural gas availability. We also take the
opportunity to roll forward the DCF. Our FY12/13 EPS fall 3%/1% to
Rs.33.3/36.5. Target price increases from Rs541 to Rs557, principally
on the roll forward.
Long term volume growth should happen; subsidy a risk
Given our position that KG D6 gas volumes can increase beyond the
current 53 mmscmd (on additional wells, capex), GAIL’s long-term
transmission volumes should also eventually increase. Other, smaller
domestic fields will also help. GAIL’s new pipelines are about to be
commissioned. These could lead to surprises on depreciation charges,
but can also cause higher weighted average transmission tariffs.
Given valuations of 2.5x 1-year forward book (with 19% RoE) and
long term growth still appearing secure, GAIL should be immune to
near-term EPS cuts. However, large FY12 subsidy payments can
potentially be imposed on it if crude remains elevated and the govt is
compelled to increase demand from upstream companies. This
appears to be the biggest near term risk. Maintain OUTPERFORM.