Gas Authority of India (GAIL.BO, Buy) :: Goldman Sachs

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Gas Authority of India (GAIL.BO, Buy)
Source of opportunity
We maintain our Buy rating on GAIL and lower the 12-month price target
to Rs549 (from Rs585 earlier) to reflect lower gas transmission volumes
assumptions in FY12-13.
We continue to believe GAIL is 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 likely bottoming out of the petchem cycle in
FY12.

Also, in India, the city gas business is likely to be dominated by GAIL
Gas, unlisted subsidiary of GAIL, which is likely to emerge as the largest
city gas player, in our view.
Catalyst
[1) Rise in gas volumes through imported LNG even if RIL does not ramp
up production in FY12-FY13; 2) GAIL Gas emerging as a big winner in
the city gas auctions in 1HFY2012; 3) petrochemical cycle recovery in
FY12.
Valuation
Our DCF-based 12-month target price for GAIL implies potential upside
of 16% from current levels. With more auctions of GAs by the Indian gas
regulator, and emerging clarity of GAIL Gas’ capex and rollout plans in
the city gas business in the coming quarters, we believe we may need to
start reflecting some value for GAIL Gas in our base case assumptions
for GAIL. We have revised our FY12E-FY13E earnings by -2% to -11% to
reflect lower gas transmission volumes.
Key risks
1) Delay in pipeline projects leading to delay in volume ramp-up, 2)
weak petrochemical prices, and 3) higher subsidy burden.