Buy Gas Authority of India Ltd With Target Of Rs 547 : PINC Research

GailGas Authority of India Ltd (GAIL), the largest natural gas midstream player, accounts for three-fourth of transportation volume and more than half of gas marketed in India. GAIL with its size and increasing presence across the value chain of gas becomes the proxy play for booming natural gas sector in India.

Aggressive Capex Plan

GAIL is incurring capex of ~Rs270bn from FY11 to FY13 in their NG transmission, petro-chemical, E&P and CGD business. Post capex phase, the capacity of all their segments should more than double to drive future earnings of GAIL.

Contribution from high margin gas transmission business to increase

Of the total planned capex, ~61% is for the NG transmission business, where company plans to increase its capacity from ~7,000 kms to ~14,000 kms by FY14. This segment has high margin (EBIT of ~76% against ~18% for the company) and risk free business model. Contribution in PBIT is likely to increase from ~50% to ~55% by FY15.

Foray into high growth CGD business

GAIL is aggressively bidding for CGD through its 100% subsidiary GAIL Gas Ltd. In the first round it won four out of six cities. Currently, it has presence in 23 cities through its one subsidiary and eight JVs and plans to cross 50 cities by FY15.

Concerns

Slower ramp-up of domestic gas, uneconomical price of LNG in the international market and lower than expected tariffs for new pipelines remain the main concerns for GAIL.

VALUATIONS AND RECOMMENDATION

We have valued GAIL’s standalone business based on DCF. For investment and E&P business we have valued at 20% discount for quoted investment and at book value for unquoted investments. At CMP of Rs456, GAIL is trading at PER of 14.5x & 13.4x and EV/ EBITDA of 10.3x & 10.7x for FY12 & FY13 respectively. However, adjusting for investments, the stock is trading at 11.2x FY12E earnings. We initiate coverage on GAIL with ‘BUY’ recommendation and target price of Rs547 for one year time horizon.

BACKGROUND

GAIL (India) Limited (GAIL) is India’s flagship PSU Company transporting ~3/4th of total gas in India. GOI holds 57.35% stake in GAIL. Over the years the company has moved across the entire value chain of Natural Gas (Exploration & Production – Processing – Transmission – Distribution – Marketing – Import – CGD). To further diversifying its portfolio, GAIL entered into the business of liquid hydrocarbons, LPG transmission and polymer production. In sync with growing India, GAIL aspires to double the capacity for all its major business in next four years.

SEGMENTAL ANALYSIS

Natural gas transmission and trading is the main business for GAIL, which contributed ~75% in topline and ~60% at PBIT in FY10. Petrochemical segment is the second major contributor for GAIL with share of ~30% at PBIT. Gas transmission is a high margin business (EBIT margin ~76%) and with ongoing capex, its contribution is likely to increase from 50% in FY10 to ~55% by FY15 leading expansion in the overall margin for the company.