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GAIL (India) (GAIL)
Energy
As bad as it gets. We reiterate our positive view on GAIL with a target price of `560 as
our reverse valuation exercise suggests that the current stock price is ascribing very little
value for its new pipelines. We maintain our ADD rating on the stock given 20%
potential upside to our target price. We are conservative in that we assume (1) a
modest ramp-up in GAIL’s transmission volumes given a slow projected ramp-up in RIL’s
KG D-6 block and (2) 39% share of upstream companies of gross under-recoveries in
FY2012-14E.
Stock price ignoring contribution from new pipelines
We see the small gap between GAIL’s stock price and the fair valuation of its extant businesses as
reflecting the market’s subdued expectations about potential value creation from new pipelines.
Our reverse valuation exercise suggests that the market is ascribing negligible value to the new
pipelines (see Exhibit 1). We value GAIL’s extant businesses (existing pipelines, LPG production and
chemicals) at about `343/share. To this we add (1) `83/share as value of investments and (2)
`15/share for valuation of GAIL’s E&P business. This translates into fair value of around `441,
which would result in implied value of `35/share (US$1 bn) for the new pipelines. GAIL has
invested US$1.3 bn so far in the new pipelines. We discuss our assumptions behind the exercise in
detail later in the note.
Concerns on gas supply are valid but may be overdone
We believe that the current valuation of GAIL reflects the market’s concerns about ramp-up of
domestic gas in India due to technical issues at RIL’s KG D-6 block. However, we highlight that we
have already factored the same in our assumptions on GAIL’s transmission volumes. We estimate
GAIL’s volumes at 120 mcm/d for FY2012E, 132 mcm/d in FY2013E and 151 mcm/d in FY2014E
versus 117 mcm/d in 1QFY12. The increase in GAIL’s transmission volumes reflects (1) start of LNG
imports from PLNG’s Kochi terminal and RGPPL’s Dabhol terminal, (2) increase in RIL’s gas
production from current abysmal levels and (3) contribution from ONGC’s new KG basin fields.
Valuations attractive—significant upside to our target price of `560
GAIL stock offers 20% potential upside to our fair valuation of `560 from current levels. We
would highlight that our earnings estimates assume 39% share of upstream companies of gross
under-recoveries. GAIL’s FY2012E EPS would increase to `38.3 (+4.6%) in the case of 33.33%
share. Finally, we note that the stock has consistently outperformed the broader market. We had
upgraded the stock on May 23, 2011.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� �
GAIL (India) (GAIL)
Energy
As bad as it gets. We reiterate our positive view on GAIL with a target price of `560 as
our reverse valuation exercise suggests that the current stock price is ascribing very little
value for its new pipelines. We maintain our ADD rating on the stock given 20%
potential upside to our target price. We are conservative in that we assume (1) a
modest ramp-up in GAIL’s transmission volumes given a slow projected ramp-up in RIL’s
KG D-6 block and (2) 39% share of upstream companies of gross under-recoveries in
FY2012-14E.
Stock price ignoring contribution from new pipelines
We see the small gap between GAIL’s stock price and the fair valuation of its extant businesses as
reflecting the market’s subdued expectations about potential value creation from new pipelines.
Our reverse valuation exercise suggests that the market is ascribing negligible value to the new
pipelines (see Exhibit 1). We value GAIL’s extant businesses (existing pipelines, LPG production and
chemicals) at about `343/share. To this we add (1) `83/share as value of investments and (2)
`15/share for valuation of GAIL’s E&P business. This translates into fair value of around `441,
which would result in implied value of `35/share (US$1 bn) for the new pipelines. GAIL has
invested US$1.3 bn so far in the new pipelines. We discuss our assumptions behind the exercise in
detail later in the note.
Concerns on gas supply are valid but may be overdone
We believe that the current valuation of GAIL reflects the market’s concerns about ramp-up of
domestic gas in India due to technical issues at RIL’s KG D-6 block. However, we highlight that we
have already factored the same in our assumptions on GAIL’s transmission volumes. We estimate
GAIL’s volumes at 120 mcm/d for FY2012E, 132 mcm/d in FY2013E and 151 mcm/d in FY2014E
versus 117 mcm/d in 1QFY12. The increase in GAIL’s transmission volumes reflects (1) start of LNG
imports from PLNG’s Kochi terminal and RGPPL’s Dabhol terminal, (2) increase in RIL’s gas
production from current abysmal levels and (3) contribution from ONGC’s new KG basin fields.
Valuations attractive—significant upside to our target price of `560
GAIL stock offers 20% potential upside to our fair valuation of `560 from current levels. We
would highlight that our earnings estimates assume 39% share of upstream companies of gross
under-recoveries. GAIL’s FY2012E EPS would increase to `38.3 (+4.6%) in the case of 33.33%
share. Finally, we note that the stock has consistently outperformed the broader market. We had
upgraded the stock on May 23, 2011.
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