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GAIL (India) (GAIL)
Energy
Upgrade to BUY. We upgrade GAIL stock to BUY from ADD noting 35% potential
upside to our SOTP-based target price of `560 (FY2013E basis). We see the recent
correction in GAIL’s stock price as a good entry point to buy the stock given a favorable
risk-reward balance. Our trough-case valuation of `487 based on FY2012E estimates
reflects no value creation from new gas pipelines, ruling out concerns on a ramp-up inOur estimates of ramp-up in gas transmission volumes for GAIL are achievable
We believe the current valuation of GAIL reflects the market’s concerns about a ramp-up of
domestic gas supply in India and diversion of gas away from GAIL’s petrochemical plant. We think
the latter is unlikely and we factor the former in our assumptions of gas transmission volume for
GAIL at 120 mcm/d (+2 mcm/d) in FY2012E, 129 mcm/d (+9 mcm/d) in FY2013E and 145 mcm/d
in FY2014E (+16 mcm/d). We highlight that LNG imports from new terminals at Kochi and Dabhol
will contribute incremental gas volumes of 5 mcm/d in FY2013E and 8 mcm/d in FY2014E. We
expect the residual increase in our gas volume estimates can be achieved by (1) contribution from
ONGC’s marginal fields and (2) gradual increase in RIL’s gas production from current low levels.
17% potential upside to trough-case assuming no value creation from new pipelines
We compute a trough-case valuation of `487/share (see Exhibit 1), based on (1) 6X annualized
1QFY12 reported EBIT for gas and LPG transmission segments, (2) 5X FY2012E EBITDA for LPG
production business assuming 39% subsidy burden on upstream companies, (3) 6X FY2012E
EBITDA of `12.8 bn (lower than reported EBITDA of `13.6 bn in FY2011) for petrochemical
segment and (4) capital WIP of `59 bn at end-FY2011 book value ignoring any value creation from
new gas pipelines.
Upgrade to BUY on attractive risk-reward balance
We upgrade the stock to BUY from our ADD rating previously noting 35% potential upside to our
SOTP-based fair valuation of `560. We use 12-month forward DCF valuation to value GAIL’s gas
transportation segment and FY2013E EBITDA to value GAIL’s other segments (LPG transportation,
LPG production and petrochemicals). Our net debt computation includes adjustment for (1)
payment of `13.2 bn under protest on account of income tax demand and (2) liability of `7.2 bn
on account of gas pool money.
Reduced FY2012-14E earnings moderately
We have revised our FY2012E, FY2013E and FY2014E EPS to `34.3, `36 and `41 from `36.6,
`39.2 and `45.3 previously to reflect (1) lower gas transmission volumes in FY2013-14E, (2)
FY2011 annual report and (3) other minor changes. We assume that the upstream companies will
bear 39% of the gross under-recoveries in FY2012-14E.
Other details from the annual report
Brahmaputra Cracker and Polymer Limited (BCPL). GAIL’s FY2011 annual report
highlights the cost and time over-runs in the BCPL project. The project cost has increased
to `92.9 bn versus `54.6 bn estimated in August 2005. The revised target of start of
commercial production is December 2013 versus January 2012 previously. However, we
do not rule out further slippages in the project. The management has highlighted several
reasons for the delay in the project, which include heavy and prolonged monsoons, poor
response from bidders, labor problems and delay in award of process technology licensors.
BCPL is setting up a 280,000 tpa polymer plant (PP, HDPE, LLDPE) and GAIL has a 70%
stake in the project.
Sharp decline in gas pool contribution reflects increase in APM gas price. We note
GAIL’s expenditure towards the gas pool account has declined to `4.3 bn in FY2011
versus `9.7 bn in FY2010 which reflects the increase in APM gas prices implemented in
May 2010.
Sharp decline in E&P expenses. We highlight the sharp decline in GAIL’s E&P related
expenses to `1.4 bn in FY2011 versus `3.5 bn in FY2010 reflecting (1) lower survey
expenses at `0.8 bn versus `1.3 bn in FY2010 and (2) lower write-offs from dry wells at
`0.5 bn versus `2.1 bn in the previous year.
Increase in gas pipeline infrastructure. The company has commissioned 761 kms of
new pipelines in FY2011 including, (1) Vijaipur-Dadri pipeline (498 kms), (2) Sultanpur-
Neemrana pipeline (175 km) and (3) Focus Energy pipeline (88 kms). GAIL now operates
8,644 kms of gas pipelines in India with a transmission capacity of 170 mcm/d. The
management has guided to commissioning of (1) Dahej-Vijaipur pipeline Phase-II (610
kms), (2) Bawana-Nangal pipeline (501 kms), (3) two compressors at Jhabua and Vijaipur
and (4) two compressors at Kailaras and Chainsa, by end-CY2011.
Key assumptions behind our earnings model
Exhibit 2 gives our key assumptions for GAIL. We discuss the same in detail below.
Gas transportation volumes. We estimate GAIL’s gas transportation volumes for
FY2012-14E at 120 mcm/d, 129 mcm/d and 145 mcm/d versus 118 mcm/d in FY2011.
The ramp-up in gas supply reflects (1) higher LNG imports at extant terminals and
commissioning of two new LNG terminals (PLNG’s Kochi terminal in FY2013E and
RGPPL’s Dabhol terminal in FY2012E), (2) higher gas supply from RIL’s KG D-6 field and (3)
contribution from ONGC’s marginal fields.
Subsidy amount. We model a subsidy amount for FY2012E, FY2013E and FY2014E at
`21.6 bn, `15.7 bn and `12.1 bn. We assume that the government-owned upstream
companies will bear 39% of the gross under-recoveries in FY2012-14E. We assume
GAIL’s share at 5.5% among the upstream companies for FY2012E. For FY2013E and
FY2014E we model GAIL’s share at 6.5% and 7%, respectively. We assume GAIL’s share
will increase as the proportion of diesel in overall under-recoveries will likely decline over
the next two years driven by lower global crude oil prices.
Crude oil and LPG price assumptions. We assume crude oil (Dated Brent) prices for
FY2012E, FY2013E and FY2014E at US$110/bbl, US$100/bbl and US$95/bbl.
Rupee-dollar exchange rate. We assume exchange rate for FY2012E, FY2013E and
FY2014E to `44.75/US$, `45.63/US$ and `45/US$.
SOTP-based target price of `560
Exhibit 3 shows our SOTP valuation model for GAIL based on FY2013E estimates
Gas transportation segment. We value GAIL’s gas transportation segment at
`387/share broken down between `139/share for extant pipelines and `248/share for
new gas pipelines (Dadri-Bawana-Nangal, Chainsa-Gurgaon-Jajjhar-Hissar, DV GREP,
Dabhol-Bangalore and Kochi-Bangalore/Mangalore). We have assumed income tax
exemption on new pipelines for the first few years as per Section 35 AD of the Indian
Income Tax Act, 1961, which allows for deduction of capital expenditure against the
income of a new gas transportation pipeline.
LPG production segment. We value the segment at `68/share based on 5X FY2013E
EBITDA. We concede that it is difficult to value the LPG segment since the segment’s
profits and profitability can vary significantly depending on (1) crude oil prices; input
(natural gas) prices are largely fixed and (2) the amount of subsidy burden.
Petrochemical segment. We value the petrochemical segment at `63/share based on 6X
FY2013E EBITDA. Our FY2013E EBITDA estimate of `13.4 bn is lower versus `13.6 bn in
FY2011.
Investments. We value the investments at `79/share assuming a 20% holding company
discount to the computed fair value. We value investment in (1) ONGC at our FY2013Ebased
fair value of `380/share, (2) Petronet LNG at our 12-month forward target price of
`125/share and (3) other quoted investments at the current market prices.
gas supply. We have updated our earnings model for the FY2011 annual report.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GAIL (India) (GAIL)
Energy
Upgrade to BUY. We upgrade GAIL stock to BUY from ADD noting 35% potential
upside to our SOTP-based target price of `560 (FY2013E basis). We see the recent
correction in GAIL’s stock price as a good entry point to buy the stock given a favorable
risk-reward balance. Our trough-case valuation of `487 based on FY2012E estimates
reflects no value creation from new gas pipelines, ruling out concerns on a ramp-up inOur estimates of ramp-up in gas transmission volumes for GAIL are achievable
We believe the current valuation of GAIL reflects the market’s concerns about a ramp-up of
domestic gas supply in India and diversion of gas away from GAIL’s petrochemical plant. We think
the latter is unlikely and we factor the former in our assumptions of gas transmission volume for
GAIL at 120 mcm/d (+2 mcm/d) in FY2012E, 129 mcm/d (+9 mcm/d) in FY2013E and 145 mcm/d
in FY2014E (+16 mcm/d). We highlight that LNG imports from new terminals at Kochi and Dabhol
will contribute incremental gas volumes of 5 mcm/d in FY2013E and 8 mcm/d in FY2014E. We
expect the residual increase in our gas volume estimates can be achieved by (1) contribution from
ONGC’s marginal fields and (2) gradual increase in RIL’s gas production from current low levels.
17% potential upside to trough-case assuming no value creation from new pipelines
We compute a trough-case valuation of `487/share (see Exhibit 1), based on (1) 6X annualized
1QFY12 reported EBIT for gas and LPG transmission segments, (2) 5X FY2012E EBITDA for LPG
production business assuming 39% subsidy burden on upstream companies, (3) 6X FY2012E
EBITDA of `12.8 bn (lower than reported EBITDA of `13.6 bn in FY2011) for petrochemical
segment and (4) capital WIP of `59 bn at end-FY2011 book value ignoring any value creation from
new gas pipelines.
Upgrade to BUY on attractive risk-reward balance
We upgrade the stock to BUY from our ADD rating previously noting 35% potential upside to our
SOTP-based fair valuation of `560. We use 12-month forward DCF valuation to value GAIL’s gas
transportation segment and FY2013E EBITDA to value GAIL’s other segments (LPG transportation,
LPG production and petrochemicals). Our net debt computation includes adjustment for (1)
payment of `13.2 bn under protest on account of income tax demand and (2) liability of `7.2 bn
on account of gas pool money.
Reduced FY2012-14E earnings moderately
We have revised our FY2012E, FY2013E and FY2014E EPS to `34.3, `36 and `41 from `36.6,
`39.2 and `45.3 previously to reflect (1) lower gas transmission volumes in FY2013-14E, (2)
FY2011 annual report and (3) other minor changes. We assume that the upstream companies will
bear 39% of the gross under-recoveries in FY2012-14E.
Other details from the annual report
Brahmaputra Cracker and Polymer Limited (BCPL). GAIL’s FY2011 annual report
highlights the cost and time over-runs in the BCPL project. The project cost has increased
to `92.9 bn versus `54.6 bn estimated in August 2005. The revised target of start of
commercial production is December 2013 versus January 2012 previously. However, we
do not rule out further slippages in the project. The management has highlighted several
reasons for the delay in the project, which include heavy and prolonged monsoons, poor
response from bidders, labor problems and delay in award of process technology licensors.
BCPL is setting up a 280,000 tpa polymer plant (PP, HDPE, LLDPE) and GAIL has a 70%
stake in the project.
Sharp decline in gas pool contribution reflects increase in APM gas price. We note
GAIL’s expenditure towards the gas pool account has declined to `4.3 bn in FY2011
versus `9.7 bn in FY2010 which reflects the increase in APM gas prices implemented in
May 2010.
Sharp decline in E&P expenses. We highlight the sharp decline in GAIL’s E&P related
expenses to `1.4 bn in FY2011 versus `3.5 bn in FY2010 reflecting (1) lower survey
expenses at `0.8 bn versus `1.3 bn in FY2010 and (2) lower write-offs from dry wells at
`0.5 bn versus `2.1 bn in the previous year.
Increase in gas pipeline infrastructure. The company has commissioned 761 kms of
new pipelines in FY2011 including, (1) Vijaipur-Dadri pipeline (498 kms), (2) Sultanpur-
Neemrana pipeline (175 km) and (3) Focus Energy pipeline (88 kms). GAIL now operates
8,644 kms of gas pipelines in India with a transmission capacity of 170 mcm/d. The
management has guided to commissioning of (1) Dahej-Vijaipur pipeline Phase-II (610
kms), (2) Bawana-Nangal pipeline (501 kms), (3) two compressors at Jhabua and Vijaipur
and (4) two compressors at Kailaras and Chainsa, by end-CY2011.
Key assumptions behind our earnings model
Exhibit 2 gives our key assumptions for GAIL. We discuss the same in detail below.
Gas transportation volumes. We estimate GAIL’s gas transportation volumes for
FY2012-14E at 120 mcm/d, 129 mcm/d and 145 mcm/d versus 118 mcm/d in FY2011.
The ramp-up in gas supply reflects (1) higher LNG imports at extant terminals and
commissioning of two new LNG terminals (PLNG’s Kochi terminal in FY2013E and
RGPPL’s Dabhol terminal in FY2012E), (2) higher gas supply from RIL’s KG D-6 field and (3)
contribution from ONGC’s marginal fields.
Subsidy amount. We model a subsidy amount for FY2012E, FY2013E and FY2014E at
`21.6 bn, `15.7 bn and `12.1 bn. We assume that the government-owned upstream
companies will bear 39% of the gross under-recoveries in FY2012-14E. We assume
GAIL’s share at 5.5% among the upstream companies for FY2012E. For FY2013E and
FY2014E we model GAIL’s share at 6.5% and 7%, respectively. We assume GAIL’s share
will increase as the proportion of diesel in overall under-recoveries will likely decline over
the next two years driven by lower global crude oil prices.
Crude oil and LPG price assumptions. We assume crude oil (Dated Brent) prices for
FY2012E, FY2013E and FY2014E at US$110/bbl, US$100/bbl and US$95/bbl.
Rupee-dollar exchange rate. We assume exchange rate for FY2012E, FY2013E and
FY2014E to `44.75/US$, `45.63/US$ and `45/US$.
SOTP-based target price of `560
Exhibit 3 shows our SOTP valuation model for GAIL based on FY2013E estimates
Gas transportation segment. We value GAIL’s gas transportation segment at
`387/share broken down between `139/share for extant pipelines and `248/share for
new gas pipelines (Dadri-Bawana-Nangal, Chainsa-Gurgaon-Jajjhar-Hissar, DV GREP,
Dabhol-Bangalore and Kochi-Bangalore/Mangalore). We have assumed income tax
exemption on new pipelines for the first few years as per Section 35 AD of the Indian
Income Tax Act, 1961, which allows for deduction of capital expenditure against the
income of a new gas transportation pipeline.
LPG production segment. We value the segment at `68/share based on 5X FY2013E
EBITDA. We concede that it is difficult to value the LPG segment since the segment’s
profits and profitability can vary significantly depending on (1) crude oil prices; input
(natural gas) prices are largely fixed and (2) the amount of subsidy burden.
Petrochemical segment. We value the petrochemical segment at `63/share based on 6X
FY2013E EBITDA. Our FY2013E EBITDA estimate of `13.4 bn is lower versus `13.6 bn in
FY2011.
Investments. We value the investments at `79/share assuming a 20% holding company
discount to the computed fair value. We value investment in (1) ONGC at our FY2013Ebased
fair value of `380/share, (2) Petronet LNG at our 12-month forward target price of
`125/share and (3) other quoted investments at the current market prices.
gas supply. We have updated our earnings model for the FY2011 annual report.
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