GAIL (India) Ltd. share price target

Beating ours as well as consensus estimates, GAIL (India) has reported a strong performance in 1QFY20. Its EBITDA grew by 1% YoY and 34% QoQ to Rs22.6bn led by higher margin (US$0.39/ mmbtu vs. US$0.26 in 1QFY19) in gas trading and higher tariff realisation (US$0.62/mmbtu vs. US$0.56 in 1QFY19) in gas pipeline segment. Despite lower spot LNG prices and 2% QoQ fall in gas trading volume, gas trading segment's EBITDA jumped by 46% QoQ on the back of favourable gas trading mix (higher RLNG and lower domestic gas). Its reported net profit grew by 2% YoY and 15% QoQ to Rs12.9bn backed by higher other income (+26% YoY) and lower interest expense (-46% YoY). The Company expects to increase the utilisation level of its petrochemical...

Concerns over petchem worsens; Gas trading one-off relief 1QFY20 EBITDA was flat YoY at INR22.6b (in-line), led by better marketing segment performance, while petchem continued its poor performance. Depreciation was higher by 7% YoY, which was offset by lower interest cost...

GAIL's Q1FY20 PAT/EBITDA surpassed estimates at Rs 13bn/Rs 23bn (+2.2%/flat YoY).

As the domestic NG ecosystem (CGD network, re-gas terminals, pipeline connectivity, revamp of fertiliser plants) develops, India could derive maximum benefit of LNG prices. Given GAIL's dominant position in India's gas pipeline network, its gas transmission business is likely to remain in a sweet spot. New US liquefaction terminals will not only boost RLNG exports but also keep Henry Hub (HH) prices subdued, enabling GAIL to swap cargoes. Thus, US LNG is not a stress point. Our SOTP target is Rs 201 (7.5x Jun-21E EV/e for the stable Gas and LPG transmission businesses, 5.0x EV/e for the volatile gas marketing business, 6.5x EV/e for the cyclical petchem and LPG/LHC businesses, Rs 36 for investments and Rs 12/sh for CWIP). GAIL reported a stable 1QFY20 led by improved profitability in gas transmission and trading segments albeit a dismal show by petchem owing to a planned shutdown. Maintain BUY.

Investing to build National Gas Grid, while growing revenue In the next few years, GAIL will invest about `450.0 billion in major crosscountry pipeline projects, such as Urja Ganga Project, Kochi Kootanad Bangalore Mangalore Pipeline, Indradhanush Gas Grid (North East Grid in joint venture mode), and other pipelines connecting crucial supply and demand centers, to build the proposed National Gas Grid (NGG). GAIL will continue to focus on the growth of its core business segments, such as natural gas, petrochemicals, and gas processing. In addition, GAIL plans to look for diversified and fresh business opportunities, which have the...

LPG prices have seen a declining trend over the last couple of months. This will have an impact on Gail's LPG/liquid hydrocarbon (LLH) business. We lower LPG/LLH realisations from | 35,000 in Q1FY20E to | 32,100 per tonne from Q2FY20E to factor in the recent decline in LPG prices in global markets. Subsequently, we expect LPG/LLH segment EBIT at | 1860.2 crore and | 1788.2 crore for FY20E and FY21E, respectively. This is expected to result in a reduction in standalone earnings estimate for Gail by ~5% to | 11.7 per...

PNGRB in its Mar'16 order issued final initial tariff for the KGBNGPL pipeline at INR45.32/mmbtu v/s the proposed INR180.77/mmbtu by GAIL. In a letter dated 22nd Oct'18, GAIL proposed tariff revision for KGBNGPL at INR47.20/mmbtu and an extension of 10 years to the life of the pipeline. However, PNGRB approved a tariff ~65% lower sharply reduced from the current INR45.32/mmbtu to INR16.14/mmbtu, effective 1st Jul'19. Sharp reduction in the revised tariff is on account of huge divergence in...

We may see some correction in the stock owing to lower than expected transmission tariff hike for the pipelines that transmit ~67% of total volumes. However, we maintain our faith given the increase in volumes from the upcoming RLNG terminals and the completion of the Kochi-Mangalore and JHBDPL pipelines. Our TP is Rs 412/sh (7.5x Mar-20E EV/e to the more stable Gas and LPG transmission businesses, 5.0x EV/e to the more volatile gas marketing business, 6.5x EV/e for the cyclical petchem and LPG/LHC businesses, Rs 75 for investments and Rs 23/sh for CWIP). Despite an underwhelming tariff revision for HVJ and HVJ upgradation pipelines, we maintain BUY on GAIL given (1) Its dominant position in Indias gas pipeline network, (2) The high share of volume in the upcoming eastern corridor gas pipeline, and (3) The clarity of earnings beyond FY22 from HVJ, which alone transmits ~27% of total transmission volumes.

Petroleum and Natural Gas Regulatory Board (PNGRB) has fixed the gas transmission integrated tariffs for Gail's HVJ old pipeline and HVJ upgradation pipelines, which account for ~60% of volumes. The tariffs have been revised upwards by just 3.8% from | 39.6/mmbtu earlier to | 41.1/mmbtu (~1.5/scm) now vs. our estimate of an upward revision in tariffs by 15-20%. Hence, we revise our blended gas transmission tariffs estimates from | 1.6/scm & 1.65/scm in FY20E & FY21E to | 1.53/scm & | 1.58/scm in FY20E & FY21E, respectively. This will result in a reduction in...

Tepid tariff hike doesn't alter buoyant outlook The PNGRB notified tariffs for five pipeline networks of GAIL, largest of them being the HVJ pipeline network (constituting ~30% of GAIL's gas transmission volumes). The integrated tariffs for HVJ at Rs41.1/mmbtu (or Rs1.44/scm) optically seem lower than the FY19 average (1.47/scm). However, we see earnings upside potential (~Rs2.4/sh) on consolidating incremental revenues from all tariff orders. We maintain earnings estimates...