GAIL: On a fast track; buy for an upside potential of 15%

Prabhudas Lilladher | Oct. 10, 2017, 4:45 p.m.

 

GAIL has multiple growth drivers in the medium term led by improving profitability at the Petrochemicals and LPG division on the back of higher volumes and benign gas prices. Implementation of unified pipeline tariff could be a game changer and remains an upside risk against our estimates of modest tariff increase. Also, concerns on placement of US LNG volumes are overdone as 86% of FY19E volumes are tied in, while for the long term, we expect US LNG will be placed in the Eastern India as government revives fertiliser plants and create new city gas networks in seven cities with potential demand of ~15mmscmd.

 

-Multiple levers to drive core performance: GAIL’s LPG earnings will benefit from increased availability of C2‐C3 from ONGC along with higher realisation. LPG transmission volumes are likely to be healthy, post sharp jump in FY17 volumes. Petrochemicals earnings post stabilisation will also benefit from higher volume and benign LNG prices, going forward.

 

- Unified tariff ‐ a game changer: Recent consultation paper by the PNGRB, gas regulator, to move gas pipeline tariffs from current postal/zonal system to a uniform model could drive GAIL tariffs to Rs57/unit against FY17 realisation of Rs37/unit. This could lead to 25% upside to FY19E estimates; our estimates factor in 10% tariff increase for FY18/19E.

 

- US shale volume; concerns abate:Contrary to market concerns, GAIL has placed ~5MTPA of its committed 5.8MTPA of US LNG volumes for FY19. For the long term, we expect volumes to be diverted to Eastern India where government plans to revive fertiliser plants and set up city gas operation in seven cities following completion of Jagdishpur‐Haldia (JHBDPL)pipeline by FY20E.

 

- Structural play on gas: We expect GAIL’s earnings to increase at 16% CAGR over FY18‐20E. Reiterate “BUY”with a revised DCF‐based PT of Rs513 (Rs429 earlier) as we revisit our volume and realisation assumptions and on roll over to FY20E



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