Friday, January 15, 2010


Re-rating imminent: GAIL is on its way to becoming a true utilities company - gas transmission will account for over 65% by FY14 from 53% in FY09 of its EBIT. Its transmission business has all the characteristics of a utilities company: (1) Large asset base with annuitylike returns, (2) Secular demand growth with strong long-term earnings visibility, and (3) Direct customer interface with CGD business. We believe that GAIL should trade at par with other utilities companies.

Geared to capture huge gas transmission opportunity: India is witnessing a big thrust in gas production from domestic finds in the Krishna-Godavari basin. We expect gas availability in India to grow at 23% CAGR to 312mmscmd by FY14, buoyed by trebling of domestic production to 254mmscmd and doubling of RLNG imports to 58mmscmd. To capture the huge transmission opportunity presented by this gas surge, GAIL is investing to double its capacity by FY12/13. We expect its transmission volumes to grow at 20% CAGR through FY14 to 208mmscmd.

HVJ-DVPL tariffs to stay intact, 10% upside likely: As against consensus expectations of tariff decline for its HVJ-DVPL network (which accounts for >65% of its total volumes), our calculations indicate that tariffs should stay intact or even increase by 10%.We expect GAIL's profits (EBIT) from the transmission business to increase 2.8x by FY14.

CGD and E&P to add substantial value, petchem capacity to double by FY12: GAIL is expanding its CGD presence from the current 9 cities to 45-50 cities in the next 4-5 years, with a gas volume potential of 25mmscmd. We believe CGD would lead to long-term value creation for GAIL and just 25mmscmd volumes would add Rs27/ share. Further value accretion would come from its E&P blocks entering production phase and doubling of petchem capacity by FY12.

Increasing FY11E EPS, upgrading target price; Buy: We remain positive on GAIL primarily due to: (1) long-term revenue visibility, (2) value creation through the CGD business, (3) potential upside from its E&P business, and (4) likely favorable policy decision on subsidy. We value GAIL on SOTP basis at Rs485 (core business at 14x FY12E EPS), investment value of Rs54/share and E&P value of Rs23/share). We believe there is further upside potential of at least Rs27/share from its CGD foray. Adjusted for investments, the stock trades at 11.7x FY12E EPS of Rs29.1. We maintain Buy.

To read the full report: GAIL