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GAIL
N: Earnings resilient but decelerating; lower TP
Earnings likely to be resilient but historical c20% EPS CAGR is
likely to moderate to c8% over FY12-14e, in our view
We expect the uncertain subsidy burden and potential
regulation of marketing margins to cloud the outlook
We retain Neutral rating but reduce our TP from INR500 to
INR405 to account for lower volumes and higher subsidy
GAIL reported Q3FY12 net profit of INR10.9bn in line with our and consensus
estimates. However, the subsidy to oil marketing companies (OMCs) was provisional and
could change after the government announces the allocation over the next few weeks. While
GAIL has maintained its transmission volume despite lower domestic gas thanks to imported
LNG, we anticipate flat transmission volume over FY13. The blended tariff for the quarter was
INR993/’000scm, which we expect to increase by 3% in FY13.
Transmission volume to remain flat. We expect GAIL to get c4mmscmd lower gas
from KG-D6 field of RIL during FY13e, which would be partly substituted by c2
mmscmd from the western coast; new volume is expected to earn the higher tariff of the
new pipeline while the KG-D6 volume was flowing through the old HVJ pipeline that has
the lower tariff. Overall, we anticipate GAIL to transmit 118.8mmscmd gas during FY13e
as against 117.8mmscmd in FY12e.
Uncertainty on subsidy and marketing margin to be an overhang. We expect the subsidy
to OMCs to be capped at earnings from its LPG business as has been the trend in the past, but
the actual amount could vary depending upon final allocation by the government. Additionally,
the government has recently asked regulator to determine the marketing margin on gas sold by
marketing entities. This could impact the marketing margin of GAIL. The marketing margin of
cUSD0.24/mmbtu contributed c20% to its net income in Q3FY12.
We lower our earning estimates. We lower our FY13e EPS estimate by c15% to account for
3-4% lower transmission volume, and 92% higher subsidy assumption for FY13.
Valuation and risks. We value GAIL on the PE of its core business and 10% holding
discount market value of investments. We reduce our target price from INR500 to INR405 but
retain Neutral rating in view of recent correction in stock. We value the core business at 11.6x
FY13e core EPS to reflect 11.5% cost of capital, 6% growth and 16% ROE, which is also in
line with the last six months’ multiple. We believe investment risks include any downward
revision in GAIL’s tariff, a higher-than-expected share in under-recovery, or different
marketing margins. Potential catalysts include new gas supply visibility, or discovery in its
exploration blocks
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GAIL
N: Earnings resilient but decelerating; lower TP
Earnings likely to be resilient but historical c20% EPS CAGR is
likely to moderate to c8% over FY12-14e, in our view
We expect the uncertain subsidy burden and potential
regulation of marketing margins to cloud the outlook
We retain Neutral rating but reduce our TP from INR500 to
INR405 to account for lower volumes and higher subsidy
GAIL reported Q3FY12 net profit of INR10.9bn in line with our and consensus
estimates. However, the subsidy to oil marketing companies (OMCs) was provisional and
could change after the government announces the allocation over the next few weeks. While
GAIL has maintained its transmission volume despite lower domestic gas thanks to imported
LNG, we anticipate flat transmission volume over FY13. The blended tariff for the quarter was
INR993/’000scm, which we expect to increase by 3% in FY13.
Transmission volume to remain flat. We expect GAIL to get c4mmscmd lower gas
from KG-D6 field of RIL during FY13e, which would be partly substituted by c2
mmscmd from the western coast; new volume is expected to earn the higher tariff of the
new pipeline while the KG-D6 volume was flowing through the old HVJ pipeline that has
the lower tariff. Overall, we anticipate GAIL to transmit 118.8mmscmd gas during FY13e
as against 117.8mmscmd in FY12e.
Uncertainty on subsidy and marketing margin to be an overhang. We expect the subsidy
to OMCs to be capped at earnings from its LPG business as has been the trend in the past, but
the actual amount could vary depending upon final allocation by the government. Additionally,
the government has recently asked regulator to determine the marketing margin on gas sold by
marketing entities. This could impact the marketing margin of GAIL. The marketing margin of
cUSD0.24/mmbtu contributed c20% to its net income in Q3FY12.
We lower our earning estimates. We lower our FY13e EPS estimate by c15% to account for
3-4% lower transmission volume, and 92% higher subsidy assumption for FY13.
Valuation and risks. We value GAIL on the PE of its core business and 10% holding
discount market value of investments. We reduce our target price from INR500 to INR405 but
retain Neutral rating in view of recent correction in stock. We value the core business at 11.6x
FY13e core EPS to reflect 11.5% cost of capital, 6% growth and 16% ROE, which is also in
line with the last six months’ multiple. We believe investment risks include any downward
revision in GAIL’s tariff, a higher-than-expected share in under-recovery, or different
marketing margins. Potential catalysts include new gas supply visibility, or discovery in its
exploration blocks
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