>GAIL INDIA LIMITED: Twin worries of gas shortage and rising subsidy -

Gas supply a worry but FY12 subsidy may be as expected

■ Twin worries of gas shortage and rising subsidy
GAIL’s 9M FY12 EPS factoring the actual subsidy (under-provision in 3Q) is up just 6% YoY. In 9M, GAIL was hit by flat gas transmission volume and 75% YoY rise in subsidy. GAIL’s volume growth was capped by gas output from the KG D6 block declining sharply. There was a concern that share in subsidy of GAIL and its upstream peers, which was 37.9% in 9M FY12, may go up further in FY12. However, now no further negative surprise on subsidy appears likely in FY12. Gas supply and subsidy would remain worries for FY13. Retain Underperform.


■ Gas supply shortage to continue; will margins be capped?
GAIL’s 9M FY12 gas transmission volume is up just 1% YoY. Its FY12 volumes are likely to be flat. Reliance Industries (RIL) has guided decline in KG D6 gas volume by 15.5mmscmd in FY13. LNG imports (capacity constraints) would not be able to make up for fall in output. Thus GAIL’s gas volume may remain flat even in FY13. GAIL’s gas transmission and trading EBITDA is up 10% YoY in 9M FY12 despite flat volume boosted by marketing margins on LNG imports. There is a risk (low in our view) that marketing margins on LNG imports could get capped.


■ FY12 subsidy may be as expected; 3Q shortfall in 4Q
The subsidy provision in the FY13 budget is at the higher end of our expectation at Rs400bn. If it was lower than expected there was risk that GAIL and its upstream peers may have to bear more subsidy than as per 9M formula (38%). Thus no further negative surprise on subsidy is likely, which means GAIL’s FY12E EPS may be up 11% YoY as expected. However, GAIL had under-provided subsidy by Rs3.35bn in 3Q, which it will have to account in 4Q. We expect GAIL’s FY12 subsidy to be 40% YoY up at Rs29.5bn.


To read full report: GAIL
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