Gail- HVJ pipeline provides growth visibility; Buy:Edelweiss

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Gail India - start-up of compressors at HVJ pipeline provides growth visibility; Buy





􀂄 Gas transmission EBIT ahead of estimates; subsidy at INR 3.46 bn
Gail India’s (GAIL) PAT at INR 9.24 bn (up 4.1% Q-o-Q, 29.5% Y-o-Y) was
higher than our estimate of INR 8.54 bn primarily due to higher than expected
natural gas transmission EBIT. Q2FY11 operational EBIT, at INR 12.7 bn, fell
1.9% Q-o-Q, due to fall in EBIT in the LPG/liquid hydrocarbons segment (-24.9%
Q-o-Q), which was offset by higher EBIT from natural gas transmission segment
(+12.5% Q-o-Q). Subsidy provided to OMCs during the quarter was INR 3.46 bn
(INR 4.5 bn in Q1FY11) with upstream companies sharing one-third of the total
under-recoveries during Q2FY11.



􀂄 Gas transmission volumes at 115 mmscmd; petrochemical sales higher
Natural gas volumes transmitted by GAIL were 1.1% lower Q-o-Q, at 114.9
mmscmd due to shutdown in PMT production in Q2FY11. However, natural gas
transmission EBIT, at INR 7.2 bn, was up 17% Y-o-Y and 12.5% Q-o-Q due to
higher volumes in the new DVPL-II pipelines (5 mmscmd) and in the partially
completed Dadri-Bawana (~1.5 mmscmd) and Chainsa-Jhajar (~1.0 mmscmd)
pipelines. Petrochemicals EBIT, at INR 2.7 bn, was lower 1.4% Y-o-Y and
4.6% Q-o-Q due to higher unit operating costs. Petrochemical sales at 107 TMT
were higher (21.6% Q-o-Q and Y-o-Y) despite lower production of 93 TMT (Pata
plant shutdown for 15 days for expansion) due to inventory destocking.
LPG/Liquid hydrocarbon EBIT, at INR 5.2 bn, was higher 13.3% Y-o-Y, but
lower 23.2% Q-o-Q due to lower production volumes (-10.6% Y-o-Y and -6.6%
Q-o-Q) and 9.4% Q-o-Q drop in LPG realisation. Natural gas trading EBIT, at
INR 1.6 bn, increased 45% Y-o-Y and 1.5% Q-o-Q after accounting for full
impact of higher marketing margins allowed by GoI w.e.f. June 1, 2010.


􀂄 Outlook and valuations: Bullish on higher utilisation; maintain ‘BUY’
GAIL’s recent 3-year 0.5 MMTPA LNG contract, combined with the recent
increased capacity of its pipeline (Vijaipur-Jhabua compressor started in
October, increasing capacity of HVJ pipeline by 11.0 mmscmd), provides
visibility for increase in pipeline transmission volumes and higher utilisation.
Going forward, we are also positive on the company’s recently expanded
petrochemical capacity (to 450 KTPA on October 2010), which will provide a
boost to earnings. We are rolling forward our SOTP fair value of GAIL to March
2012 and are revising it upwards to INR 570/share from INR 533/share earlier.
At CMP of INR 487, the stock is trading at 15.8x our FY12E earnings, 3.0x our
FY12E book and 10.8x FY12E EV/EBITDA. We maintain our ‘BUY/Sector
Outperformer’ recommendation on the stock.