>GAIL INDIA LIMITED (CITI)

Buy: Tax Incentive for Pipelines Could Add Rs20/share to DCF

■ Tax benefit could add ~Rs20/share to DCF — While there are still some unresolved issues, we attempt to analyse the impact to GAIL’s DCF of the tax incentives provided in yesterday's Union Budget for gas pipelines (Section 35AD – almost entire investment on gas pipelines to be made tax deductible). As per our analysis (see Figure 1), our DCF value could increase by ~Rs20/share (from Rs339 currently) due to the tax benefits accruing as the cash tax payable declines (only MAT for the first 6-7 years). While impact on cash flows is material, impact on earnings need not be meaningful as deferred tax component may also rise (if effective tax rate remains largely unchanged).

■ Key assumptions — Our analysis is premised on – (i) Rs240bn of capex over FY10-13E as per company guidance, (ii) tax benefit allowed only on all gas transmission earnings, (iii) accumulated losses allowed to be carried forward (if capex in a particular year exceeds gas segment earnings), and (iv) loss on the gas business cannot be set off against income from other businesses (viz. petchem, LPG). While there is still some uncertainty on some of the issues, we expect these to sorted out given the government impetus for the sector.

■ Maintain Buy/Low risk — We maintain our Buy (1L) rating with a TP of Rs339. The announcement in the Budget of the development of a blueprint for a National Gas Grid is a long-term positive for the sector in general and GAIL in particular, as it could be an active participant in this roll-out. GAIL is also aggressively pursuing city gas opportunities, which would be given a thrust following the gov’t impetus for roll out of gas infrastructure, and this could be another medium-term value driver, though we currently ascribe no value to it.

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