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Growth Potential in ‘Pipeline’
GAIL faces a litany of woes such as declining gas supply, possibility of a limit on
marketing margin, irrational bidding for new pipelines and rising upstream
subsidy burden. We believe the risk-reward ratio is quite favourable with limited
downside risk as its stock price is just 8% away from our worst-case scenario
target. We assign Buy rating to GAIL with a target price of Rs427.
Market ignoring contribution from new pipelines: We see a wide gap between our
fair value for new pipelines (despite assuming very sedate capacity utilisation rate in
the initial years) and market implied value for these pipelines. Our reverse calculation
indicates the market is assigning a value of only Rs32/share for new pipelines
(~Rs46.98bn) compared to an investment of more than Rs95bn in them. As per
our calculation, the fair value of the same stands at Rs105/share and the value of
operational pipelines at Rs119/share.
Transmission volume negatives priced in: We believe GAIL will achieve gas
transmission volumes of 119/121/135mmscmd in FY12E/13E/14E, respectively, with a
favourable risk-reward ratio for increase in volumes on the back of additional supplies
from Dabhol and Kochi LNG from 2HFY13 and incremental production from ONGC
marginal fields. Additional volume from new pipelines will increase blended tariff to
Rs1,125/tscm in FY14E from Rs880/tscm in FY11. Blended tariff in 3QFY12 stood at
Rs993/tscm on ~7mmscmd of gas transported via the newly built DVPL (Dahej-Vijaipur
Pipe Line). We expect transmission EBITDA to show a CAGR of 13.88% over FY11-
14E.
Regulatory boost for tariff on lower capex, opex on new pipelines: GAIL is
expected to charge a higher tariff for its new DVPL, despite having lower capital
expenditure and operating expenditure compared to approved capital costs. It can
charge higher tariff until 2015 before adjusting it lower to the approved tariff level of
Rs53/mmBtu.
Marketing margin limit fears exaggerated: We believe the limit on marketing margin
will be applicable to domestic gas rather than being extended to imported gas as well.
We have assumed marketing margin of Rs407/Rs391/Rs364 per tscm for
FY12E/13E/14E, respectively, compared to Rs262/tscm in FY11.
Petrochem margin accentuated by gas cracking: We have assumed petrochemical
realisation at US$1,530/1,550 for FY13E/FY14E, respectively. We expect the polymer
chain margin to continue to be aided by buoyant gas cracker margin and lower supplies
in the Asia-Pacific region in the next two years.
Outlook and valuation: We have valued GAIL on a SOTP basis, assigning a target
price of Rs427. Our target price implies one-year forward PE of 10.5x and 1.9x P/BV.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Growth Potential in ‘Pipeline’
GAIL faces a litany of woes such as declining gas supply, possibility of a limit on
marketing margin, irrational bidding for new pipelines and rising upstream
subsidy burden. We believe the risk-reward ratio is quite favourable with limited
downside risk as its stock price is just 8% away from our worst-case scenario
target. We assign Buy rating to GAIL with a target price of Rs427.
Market ignoring contribution from new pipelines: We see a wide gap between our
fair value for new pipelines (despite assuming very sedate capacity utilisation rate in
the initial years) and market implied value for these pipelines. Our reverse calculation
indicates the market is assigning a value of only Rs32/share for new pipelines
(~Rs46.98bn) compared to an investment of more than Rs95bn in them. As per
our calculation, the fair value of the same stands at Rs105/share and the value of
operational pipelines at Rs119/share.
Transmission volume negatives priced in: We believe GAIL will achieve gas
transmission volumes of 119/121/135mmscmd in FY12E/13E/14E, respectively, with a
favourable risk-reward ratio for increase in volumes on the back of additional supplies
from Dabhol and Kochi LNG from 2HFY13 and incremental production from ONGC
marginal fields. Additional volume from new pipelines will increase blended tariff to
Rs1,125/tscm in FY14E from Rs880/tscm in FY11. Blended tariff in 3QFY12 stood at
Rs993/tscm on ~7mmscmd of gas transported via the newly built DVPL (Dahej-Vijaipur
Pipe Line). We expect transmission EBITDA to show a CAGR of 13.88% over FY11-
14E.
Regulatory boost for tariff on lower capex, opex on new pipelines: GAIL is
expected to charge a higher tariff for its new DVPL, despite having lower capital
expenditure and operating expenditure compared to approved capital costs. It can
charge higher tariff until 2015 before adjusting it lower to the approved tariff level of
Rs53/mmBtu.
Marketing margin limit fears exaggerated: We believe the limit on marketing margin
will be applicable to domestic gas rather than being extended to imported gas as well.
We have assumed marketing margin of Rs407/Rs391/Rs364 per tscm for
FY12E/13E/14E, respectively, compared to Rs262/tscm in FY11.
Petrochem margin accentuated by gas cracking: We have assumed petrochemical
realisation at US$1,530/1,550 for FY13E/FY14E, respectively. We expect the polymer
chain margin to continue to be aided by buoyant gas cracker margin and lower supplies
in the Asia-Pacific region in the next two years.
Outlook and valuation: We have valued GAIL on a SOTP basis, assigning a target
price of Rs427. Our target price implies one-year forward PE of 10.5x and 1.9x P/BV.
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