Gail --Cut FY11E EPS by 7% on higher subsidy but still up 12% YoY „:: BofA Merrill Lynch

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Gail India Ltd.
   
Cut FY11E EPS by 7% on higher
subsidy but still up 12% YoY
„FY11 EPS cut by 7% to Rs27.66 on higher subsidy
FY11 subsidy sharing has been finalized today. The main negative surprise is that
upstream companies’ share in subsidy has been raised to 38.7% of FY11 subsidy
as against the expected 33.3%. We therefore cut FY11E EPS of GAIL by 7%.
Despite a higher share in subsidy we expect GAIL’s FY11 EPS to be 12% YoY
higher driven mainly by gas transmission EBITDA rise. Gas transportation volume
growth is a concern for GAIL in FY12E. The share of upstream in subsidy being
increased to 38.7% is now an additional concern. GAIL may not also gain from
fuel price hikes if only diesel price is hiked and LPG-kerosene price are kept
unchanged. We therefore retain underperform on GAIL.  
FY11 EPS up 12% YoY despite higher subsidy
GAIL’s FY11 EPS at Rs27.7 is expected to be 12% YoY higher despite 59%
(Rs7.8bn) YoY higher subsidy and petrochemical EBIT being YoY lower. GAIL’s
gas transmission business is expected to be the main driver of its FY11E
earnings. GAIL’s gas transmission EBITDA was up 24% YoY in 9M driven by 13%
higher volumes and higher tariff. We expect FY11 gas transmission EBITDA to be
28% YoY.
Concern over increased subsidy & volume growth
The share of upstream in subsidy being increased to 38.7% is a concern. It
means that upstream share in subsidy being 33% is no longer sacrosanct. It has
created uncertainty about upstream company earnings. There appears to be a
risk that upstream share in subsidy may be increased even in future to cap their
earnings growth.