>GAIL INDIA LIMITED (ICICI SECURITIES)

KG expands earnings

GAIL registered Q1FY10 recurring earnings of Rs7.3bn, slightly below I-Sec estimates of Rs7.6bn, despite higher-than-expected gas transmission volumes of 97mmscmd (I-Sec: 91mmscmd). Recurring earnings dipped 40.2% YoY due to LPG & petchem EBIT declining 31% YoY & 46% YoY respectively and dry well write-off expenses of Rs702mn. Dip in cyclical EBIT was due to lower product prices, despite steep 81% YoY dip in subsidy burden. Natural-gas transmission EBIT increased 35% YoY on the back of natural-gas volumes rising 14.4% YoY. The stock has run-up 27% and outperformed the Sensex 20% over the past month owing to favourable policy decisions. However, the government instructing GAIL to share auto-fuel under-recoveries and possible reduction in HVJ tariffs could create an overhang on the stock. Even after factoring in favourable changes as regards Section 35AD of the Income Tax (IT) Act, we believe the stock is trading at par with our target price estimates. Given lack of any significant short-term trigger, and potential downside due to adverse subsidy sharing formula, we believe long-term investors should book some profits. We downgrade to HOLD from Buy.

■ LPG & Petchem YoY EBIT dips 31% & 46% respectively due to lower product prices. LPG & Petchem realisations dropped 14% & 47% YoY to US$466/te & Rs66,000/te respectively. This was despite sharp 81% dip in upstream subsidy burden to Rs747mn. Fall in LPG and Petchem EBIT was partially offset by improvement in gas transmission and trading business EBIT that grew 35% and 12% YoY on the back of uptick in gas supplies from the KG D6 block, Petronet LNG and Shell LNG terminals.

■ Reported net income dips 46% YoY to Rs6.6bn due to lower EBIT from LPG and petrochemical businesses. Recurring earnings were lower at Rs7.3bn owing to drywell expenses of Rs702mn in the quarter.

■ Valuations not attractive anymore. Post announcement of the subsidy sharing scheme for FY10 and our subsequent upgrade (to BUY from Hold), the stock has run up 27% and outperformed the Sensex 20%. However, inclusion of GAIL in auto-fuel under-recovery sharing and replacement of Section 80-IA with Section 35AD of the IT Act is a negative surprise. Post recent run-up, the stock is trading at 5% premium to our target price of Rs336/share. Though favourable resolution of the Section 35AD issue and better-than-expected petchem & LPG prices could add further upside to our target price, we advise investors to book profits.

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