>GAIL (CITI)

Buy: Risk/Reward Still Favorable; Increasing TP to Rs288

■ Maintain Buy; risk/reward favorable — GAIL has outperformed the Sensex by 17% in the last year, though the market rally in the last month has seen it underperform by 18%, offering an improved risk/reward for investors seeking exposure to the rapidly developing gas sector in India. We maintain our Buy rating while upgrading our risk rating a notch to Low from Medium as KG gas commencement increases visibility for transmission volumes while simultaneously, cyclical businesses become less critical for its growth.

■ Raising TP to Rs288 — Our new TP of Rs288 (Rs240 earlier) is derived from our Mar-10 DCF value and includes Rs74 value of investments. Our TP also imputes a multiple of 5.5x EV/EBITDA for the existing business and 2.0x P/B for new pipeline investments. The change in TP is driven by: (i) higher transmission vols – we are increasing KG vols in FY10E from 17 to 25 mmscmd (10 through HBJ/DVPL + 15 through others) and in FY11E from 32 to 40 mmscmd (20 + 20), (ii) change in capex assumptions – total Rs300bn capex (Rs240bn on pipelines) over FY10-13E vs. Rs267bn earlier, (iii) 2:1 D/E for new capex (1:1 earlier), and (iv) higher value of investments (Rs74 vs. Rs59).

■ Possible upside from lower tariff reduction, city gas — Our TP continues to factor in Rs5bn (~30%) of downside to tariffs. GAIL mgmt has expressed confidence on the issue of regulatory risk to pipeline tariffs, stating that it envisaged almost no reduction in HBJ/DVPL tariffs. Our TP could increase to Rs310 if the reduction in tariffs is lower at 20% and to Rs330 with only a 10%
reduction. GAIL has also identified city gas as a key thrust area, which could add value over the medium term, though we currently ascribe no value to it.

To see full report: GAIL