Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GAIL (India)
Long-term growth intact,
near-term concern about gas
supplies
What's Changed
Price Target Rs562.00 to Rs533.00
F2012-13e EPS -6.7%/-10.9%
We reiterate our Overweight call on GAIL for three
key reasons: 1) GAIL should benefit from higher gas
volumes with the start-up of LNG terminals; 2) higher oil
prices benefit its petrochemical division, partially
mitigating higher subsidy burden; 3) E&P should make a
significant earnings impact from F2014.
Higher LNG volumes to drive medium-term growth,
though F2012 growth is a concern: We estimate a
transmission volume CAGR of 7% for F2011-14, despite
a slowdown in domestic gas, as we expect higher LNG
volumes with the start-up of the Dabhol and Kochi
terminals. We highlight that as volumes grow, GAIL
gains further as the incremental gas flows through new
pipelines, which enjoy higher tariffs than older pipelines.
However, in F2012, with domestic supplies stagnant we
remain concerned about near-term growth.
Gas cracker advantage: GAIL has a gas feedstock
based cracker. Its gas prices are fixed at US$5.2/mmbtu
and do not increase in line with higher oil prices. GAIL
thus generates the highest EBITDA/ton among its Asian
peers. GAIL seeks to increase its petrochemical
capacity further to 1.4-1.5mntpa (net to GAIL) by F2015.
E&P division – significant impact from F2014: Blocks
A1/A3 in Myanmar (GAIL owns 8.5%) are slated to start
production in May 2013. On one full year of production,
this asset could contribute 7-10% to the bottom line.
Cutting F2012e EPS by 6.7% and F2013e by 10.9%;
price target down 5% to Rs533/share: Key changes
reflect higher subsidy burden due to higher oil prices and
lower gas volumes in F2012 due to decline in RIL’s KG
D6 volumes.
Investment Thesis
• GAIL has a virtual monopoly on gas
pipelines in India; it owns 7,200 km of
gas pipelines, largely concentrated in
West-Central India.
• GAIL’s transmission business should
gain in the future from two key
sources: a) Higher gas volume from
LNG imports; b) higher tariffs from the
new pipelines.
• GAIL’s petrochemical EBITDA per ton
is the highest among Asian peers due
to its gas cracker advantage.
• E&P foray to account for 7-10% of
GAIL’s profits effective F2014e.
Key Catalysts
• Efficient execution of its pipeline
expansion plans to build an additional
7,000 km of pipeline network across
the country.
• Retail price hike and falling crude oil
prices could lower the country’s
petroleum subsidy and in turn GAIL’s
subsidy burden.
• A stable pipeline pricing policy could
remove the uncertainty on pipeline
tariffs for GAIL.
Key Risks
• Sharing of LPG, kerosene subsidy
losses. GAIL expects some
transparency from GOI this quarter.
• Execution risk to build the new
pipelines.
• Lower transportation tariff.
We Reiterate Our Overweight Rating on GAIL
Gas Volumes, Petrochemical Outlook, E&P Impact
We cut our earnings forecasts by 6.7% in F2012 and 10.9%
in F2013… We factor in 1) a higher subsidy burden in an
environment of higher oil prices and 2) a lower gas volume
assumption in F2012, mainly due to decline in volumes from
RIL’s KG D6.
Exhibit 1 shows key changes to our earnings assumptions. We
now estimate GAIL’s EBITDA and net income to post healthy
CAGRs of 15% and 13%, respectively, during F2011-13.
…and cut our price target by 5% to Rs533/share… This
implies upside of 18% from current levels.
…but remain positive for three key reasons:
1) GAIL should benefit from higher gas volumes with the
start-up of LNG terminals – Dabhol in February 2012 and
Kochi in late 2012. When operational, together these
terminals should account for ~10MT of LNG
(~36mmscmd) of natural gas.
2) Higher oil prices benefit its petrochemical division, which
partially mitigates higher subsidy burden.
3) GAIL’s E&P business in Myanmar, where it has an 8.5%
stake, should account from 7-10% of GAIL’s profits
effective from F2014.
Exhibit 1
GAIL: What’s Changed?
F2012E F2013E
Gas Volume (mmscmd)
Old 133.9 146.7
New 122.7 131.7
Change -8.4% -10.2%
Subsidy burden (Rs mn)
Old 25,539 25,539
New 30,909 30,909
Change 21.0% 21.0%
EBITDA-Natural Gas Transmission
Old 32,077 39,986
New 27,392 33,235
Change -14.6% -16.9%
EBITDA-Petrochemicals
Old 17,492 20,001
New 18,525 20,420
Change 5.9% 2.1%
EBITDA-LPG
Old 7,157 7,724
New 6,409 6,775
Change -10.4% -12.3%
Operating Profit(Rs)
Old 69,555 81,576
New 64,402 73,289
Change -7.4% -10.2%
EPS (Rs)
Old 34.5 40.4
New 32.2 36.0
Change -6.7% -10.9%
Source: Company data, Morgan Stanley Research
Reason #1: Higher LNG Volumes
New terminals to drive growth in medium term… We
estimate a transmission volume CAGR of 7% (F2011-14)
despite a slowdown in domestic gas. We expect higher LNG
volumes with the start-up of Dabhol and Kochi terminals.
…although F2012 growth is a concern: However, in F2012,
with domestic supplies stagnant mainly due to a decline in KG
D6 volumes, we now do not expect GAIL’s transmission
volume to grow in the next three quarters. For this reason, we
expect GAIL’s transmission volumes to average ~123mmscmd
– just about the level of its current transmission volumes, as
highlighted by management during the analyst meeting.
We expect the next leg of volume growth once the Dabhol and
Kochi terminals start up in CY2012 and then reach their full
capacity in the next few years. At full capacity, we estimate
they would account for ~36mmscmd of natural gas volumes.
Incremental gas transmission volumes would be at higher
transmission tariffs: We highlight that as GAIL’s volumes
increase, its gains are further accentuated. The incremental
gas is to flow through the new pipelines, transmission tariffs for
which are much higher than those of existing old pipelines.
For example, the tariff for GAIL’s new pipelines (DVPL/GREP
upgrade) is at Rs53.65 mmbtu, or Rs2014/tscm – more than
twice the existing tariffs from HVJ-GREP-DVPL pipeline.
Reason #2: The Gas Cracker Advantage
Petrochemical division to benefit from higher oil prices:
GAIL has a gas-based cracker with capacity of 450ktpa. Its gas
price is fixed at Rs5.2/mmbtu, which does not increase in line
with oil prices. GAIL thus enjoys the highest EBITDA/ton
among its Asian peers. This partially mitigates the impact of
higher subsidy burden from higher oil prices, as petrochemical
prices also tend to increase in line with oil prices.
GAIL is also planning to increase petrochemical capacity to
1.4-1.5 mntpa (net to GAIL) by F2015 and plans to invest close
to Rs98 bn (US$2 bn-plus). PATA expansion will be a gas
based feedstock plant, while OPaL (ONGC Petro additions
Ltd.) and BCPL (Brahmaputra Cracker & Polymer Ltd) plants
will be dual-feedstock plants using both gas and naphtha as
their feedstock. Exhibit 3 shows details of the expansion plan.
Reason #3: E&P Profits
To make a significant impact from F2014: GAIL owns an
8.5% effective stake in Myanmar blocks A1/A3, which are
expected to start production in May 2013. We estimate that on
one full year of production, this asset could contribute 7-10% of
the company’s bottom line. Exhibits 4-5 show our key
assumptions for earnings and DCF
Valuations Look Attractive
GAIL trades at a P/E of 14x F2012e and EV/EBITDA of 8.9x,
versus its global comps, which trade at 15.5x and 9.5x,
implying discounts of ~10% and ~6% respectively. However,
adjusting for value of marketable investment, the core business
is trading at a P/E of 12.2x and EV/EBITDA of 7.7x – implying
discounts of ~21% and ~19% respectively.
Price Target Calculation
Our price target of Rs533 is based on our sum-of-the-parts
valuation (Exhibit 6). To arrive at our new price target, we take
the EV/EBITDA multiples of comparable European and US gas
pipeline companies and global petrochemical companies. This
yields our target multiple of 9.1x. Applying this to our F2012e
EBITDA estimate, we value the core business at Rs460/share.
We value GAIL’s 8.5% effective stake in A1/A3 E&P blocks in
Myanmar on a DCF basis. Based on a WACC of 11%, we value
the E&P division at Rs13/share.
To this, we add the value of quoted equity investments at a
15% discount from current market prices. We are now applying
this discount because of volatility in the Indian market. We
continue to take non-traded investments at book value. This
equates to Rs61/share.
Exhibit 6
GAIL: Price Target Calculations
EV/EBITDA Weightage EV/EBITDA
Median Gas Pipelines 9.6 75% 9.6
Median Global Petrochemical companies 7.5 25% 7.5
Average GAIL multiple for PT Calculation 9.1
EBITDA - F2012e 64,402
Core Business EV (Rs mn) 584,062
Base Case Core Business Price (Rs/share) 460
Value of E&P business 13
Total Value of Investments Rs./share) 61
Net Debt/(cash) for F2011e 1
GAIL Base Case PT(Rs/share) 533
Source: Company data, Morgan Stanley Research
Risks to Price Target:
• Sharing of LPG, kerosene subsidy losses.
• Execution risk to build the new pipelines.
• Lower transportation tariffs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GAIL (India)
Long-term growth intact,
near-term concern about gas
supplies
What's Changed
Price Target Rs562.00 to Rs533.00
F2012-13e EPS -6.7%/-10.9%
We reiterate our Overweight call on GAIL for three
key reasons: 1) GAIL should benefit from higher gas
volumes with the start-up of LNG terminals; 2) higher oil
prices benefit its petrochemical division, partially
mitigating higher subsidy burden; 3) E&P should make a
significant earnings impact from F2014.
Higher LNG volumes to drive medium-term growth,
though F2012 growth is a concern: We estimate a
transmission volume CAGR of 7% for F2011-14, despite
a slowdown in domestic gas, as we expect higher LNG
volumes with the start-up of the Dabhol and Kochi
terminals. We highlight that as volumes grow, GAIL
gains further as the incremental gas flows through new
pipelines, which enjoy higher tariffs than older pipelines.
However, in F2012, with domestic supplies stagnant we
remain concerned about near-term growth.
Gas cracker advantage: GAIL has a gas feedstock
based cracker. Its gas prices are fixed at US$5.2/mmbtu
and do not increase in line with higher oil prices. GAIL
thus generates the highest EBITDA/ton among its Asian
peers. GAIL seeks to increase its petrochemical
capacity further to 1.4-1.5mntpa (net to GAIL) by F2015.
E&P division – significant impact from F2014: Blocks
A1/A3 in Myanmar (GAIL owns 8.5%) are slated to start
production in May 2013. On one full year of production,
this asset could contribute 7-10% to the bottom line.
Cutting F2012e EPS by 6.7% and F2013e by 10.9%;
price target down 5% to Rs533/share: Key changes
reflect higher subsidy burden due to higher oil prices and
lower gas volumes in F2012 due to decline in RIL’s KG
D6 volumes.
Investment Thesis
• GAIL has a virtual monopoly on gas
pipelines in India; it owns 7,200 km of
gas pipelines, largely concentrated in
West-Central India.
• GAIL’s transmission business should
gain in the future from two key
sources: a) Higher gas volume from
LNG imports; b) higher tariffs from the
new pipelines.
• GAIL’s petrochemical EBITDA per ton
is the highest among Asian peers due
to its gas cracker advantage.
• E&P foray to account for 7-10% of
GAIL’s profits effective F2014e.
Key Catalysts
• Efficient execution of its pipeline
expansion plans to build an additional
7,000 km of pipeline network across
the country.
• Retail price hike and falling crude oil
prices could lower the country’s
petroleum subsidy and in turn GAIL’s
subsidy burden.
• A stable pipeline pricing policy could
remove the uncertainty on pipeline
tariffs for GAIL.
Key Risks
• Sharing of LPG, kerosene subsidy
losses. GAIL expects some
transparency from GOI this quarter.
• Execution risk to build the new
pipelines.
• Lower transportation tariff.
We Reiterate Our Overweight Rating on GAIL
Gas Volumes, Petrochemical Outlook, E&P Impact
We cut our earnings forecasts by 6.7% in F2012 and 10.9%
in F2013… We factor in 1) a higher subsidy burden in an
environment of higher oil prices and 2) a lower gas volume
assumption in F2012, mainly due to decline in volumes from
RIL’s KG D6.
Exhibit 1 shows key changes to our earnings assumptions. We
now estimate GAIL’s EBITDA and net income to post healthy
CAGRs of 15% and 13%, respectively, during F2011-13.
…and cut our price target by 5% to Rs533/share… This
implies upside of 18% from current levels.
…but remain positive for three key reasons:
1) GAIL should benefit from higher gas volumes with the
start-up of LNG terminals – Dabhol in February 2012 and
Kochi in late 2012. When operational, together these
terminals should account for ~10MT of LNG
(~36mmscmd) of natural gas.
2) Higher oil prices benefit its petrochemical division, which
partially mitigates higher subsidy burden.
3) GAIL’s E&P business in Myanmar, where it has an 8.5%
stake, should account from 7-10% of GAIL’s profits
effective from F2014.
Exhibit 1
GAIL: What’s Changed?
F2012E F2013E
Gas Volume (mmscmd)
Old 133.9 146.7
New 122.7 131.7
Change -8.4% -10.2%
Subsidy burden (Rs mn)
Old 25,539 25,539
New 30,909 30,909
Change 21.0% 21.0%
EBITDA-Natural Gas Transmission
Old 32,077 39,986
New 27,392 33,235
Change -14.6% -16.9%
EBITDA-Petrochemicals
Old 17,492 20,001
New 18,525 20,420
Change 5.9% 2.1%
EBITDA-LPG
Old 7,157 7,724
New 6,409 6,775
Change -10.4% -12.3%
Operating Profit(Rs)
Old 69,555 81,576
New 64,402 73,289
Change -7.4% -10.2%
EPS (Rs)
Old 34.5 40.4
New 32.2 36.0
Change -6.7% -10.9%
Source: Company data, Morgan Stanley Research
Reason #1: Higher LNG Volumes
New terminals to drive growth in medium term… We
estimate a transmission volume CAGR of 7% (F2011-14)
despite a slowdown in domestic gas. We expect higher LNG
volumes with the start-up of Dabhol and Kochi terminals.
…although F2012 growth is a concern: However, in F2012,
with domestic supplies stagnant mainly due to a decline in KG
D6 volumes, we now do not expect GAIL’s transmission
volume to grow in the next three quarters. For this reason, we
expect GAIL’s transmission volumes to average ~123mmscmd
– just about the level of its current transmission volumes, as
highlighted by management during the analyst meeting.
We expect the next leg of volume growth once the Dabhol and
Kochi terminals start up in CY2012 and then reach their full
capacity in the next few years. At full capacity, we estimate
they would account for ~36mmscmd of natural gas volumes.
Incremental gas transmission volumes would be at higher
transmission tariffs: We highlight that as GAIL’s volumes
increase, its gains are further accentuated. The incremental
gas is to flow through the new pipelines, transmission tariffs for
which are much higher than those of existing old pipelines.
For example, the tariff for GAIL’s new pipelines (DVPL/GREP
upgrade) is at Rs53.65 mmbtu, or Rs2014/tscm – more than
twice the existing tariffs from HVJ-GREP-DVPL pipeline.
Reason #2: The Gas Cracker Advantage
Petrochemical division to benefit from higher oil prices:
GAIL has a gas-based cracker with capacity of 450ktpa. Its gas
price is fixed at Rs5.2/mmbtu, which does not increase in line
with oil prices. GAIL thus enjoys the highest EBITDA/ton
among its Asian peers. This partially mitigates the impact of
higher subsidy burden from higher oil prices, as petrochemical
prices also tend to increase in line with oil prices.
GAIL is also planning to increase petrochemical capacity to
1.4-1.5 mntpa (net to GAIL) by F2015 and plans to invest close
to Rs98 bn (US$2 bn-plus). PATA expansion will be a gas
based feedstock plant, while OPaL (ONGC Petro additions
Ltd.) and BCPL (Brahmaputra Cracker & Polymer Ltd) plants
will be dual-feedstock plants using both gas and naphtha as
their feedstock. Exhibit 3 shows details of the expansion plan.
Reason #3: E&P Profits
To make a significant impact from F2014: GAIL owns an
8.5% effective stake in Myanmar blocks A1/A3, which are
expected to start production in May 2013. We estimate that on
one full year of production, this asset could contribute 7-10% of
the company’s bottom line. Exhibits 4-5 show our key
assumptions for earnings and DCF
Valuations Look Attractive
GAIL trades at a P/E of 14x F2012e and EV/EBITDA of 8.9x,
versus its global comps, which trade at 15.5x and 9.5x,
implying discounts of ~10% and ~6% respectively. However,
adjusting for value of marketable investment, the core business
is trading at a P/E of 12.2x and EV/EBITDA of 7.7x – implying
discounts of ~21% and ~19% respectively.
Price Target Calculation
Our price target of Rs533 is based on our sum-of-the-parts
valuation (Exhibit 6). To arrive at our new price target, we take
the EV/EBITDA multiples of comparable European and US gas
pipeline companies and global petrochemical companies. This
yields our target multiple of 9.1x. Applying this to our F2012e
EBITDA estimate, we value the core business at Rs460/share.
We value GAIL’s 8.5% effective stake in A1/A3 E&P blocks in
Myanmar on a DCF basis. Based on a WACC of 11%, we value
the E&P division at Rs13/share.
To this, we add the value of quoted equity investments at a
15% discount from current market prices. We are now applying
this discount because of volatility in the Indian market. We
continue to take non-traded investments at book value. This
equates to Rs61/share.
Exhibit 6
GAIL: Price Target Calculations
EV/EBITDA Weightage EV/EBITDA
Median Gas Pipelines 9.6 75% 9.6
Median Global Petrochemical companies 7.5 25% 7.5
Average GAIL multiple for PT Calculation 9.1
EBITDA - F2012e 64,402
Core Business EV (Rs mn) 584,062
Base Case Core Business Price (Rs/share) 460
Value of E&P business 13
Total Value of Investments Rs./share) 61
Net Debt/(cash) for F2011e 1
GAIL Base Case PT(Rs/share) 533
Source: Company data, Morgan Stanley Research
Risks to Price Target:
• Sharing of LPG, kerosene subsidy losses.
• Execution risk to build the new pipelines.
• Lower transportation tariffs.
No comments:
Post a Comment