>INDIAN NATURAL GAS (CITI)

Looking for Value After Market Run-up

■ GAIL new top pick, TP of Rs339 — Given the recent run-up in the markets, we take a fresh look at our stock recommendations among Indian gas utilities. We now prefer GAIL over other gas utilities driven by recent underperformance (-10% vs. Sensex in the last month) and strong performance by GSPL, our erstwhile top pick (+12%). Our TP increase (from Rs288 to Rs339) is driven by lower WACC and subsidy assumptions, with further upside possible given conservative assumptions on tariffs and no value accretion from city gas.

■ Maintain Buy on GSPL — While GSPL growth outlook is more pronounced than GAIL, outperformance will likely be contingent on a change in the outcome, likely or perceived, of the social tax issue. We are increasing our TP to Rs70 following our lower WACC assumptions. While we continue with 30% social tax contribution, we are now assuming it to be tax deductible. Further upside could come from partial or complete revocation of the directive by the state gov’t.

■ PLNG stays Sell; prefer Ggas among city gas distributors — We maintain Sell (3H) on Petronet LNG, the best-performing stock in our universe, outperforming Sensex by 40% in last two months, as a robust global long-term LNG outlook drives uncertainty on the future viability of R-LNG in India. Amongst the city gas distributors, we prefer Ggas, Buy (1L), to IGL, Hold (2M), due to relatively lower regulatory risk and negligible impact of proposed increase in APM prices.

■ Increasing TPs on lower cost of capital — We are increasing TPs across our universe driven by our lower cost of capital assumptions, which now factor in riskfree rate of 6.5% and equity risk premium of 6.0%.

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