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GAIL (India) Ltd. | Q2FY14 First Cut Analysis




IndiaNivesh Securities Pvt Ltd


25 Oct 2013





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GAIL (India) Ltd. | Q2FY14 First Cut Analysis Adjusted PAT in line with our expectation GAIL Q2 FY14 reported PAT above our expectation on the back of better than estimated margin from natural gas trading business and higher other income. Reported net profit stood at (decreased by 7% YoY up 13.3% QoQ) Rs 9.15 bn. However adjusted PAT (excluding impact of higher other income) comes at 8.45 bn in line with our estimates of 8.6 bn. LPG and liquid hydrocarbon segment recorded loss during Q2FY14 due to higher input cost and subsidy burden. The company shared LPG subsidy burden Rs. 6.98 bn vs. 7 bn in Q1FY14 and Rs. 7.8 bn in Q2FY13. Top line increased by 22.7% YoY to Rs. 139.44 bn (higher than our estimates of Rs 127.42) mainly by 28% YoY increase in natural gas trading business and 28% increase in petrochemical segment. Despite lower volume natural gas transmission revenue increased by 8.4% YoY and 6.74% to Rs. 10.66 bn, benefited from Rupee depreciation. On operational front, despite higher spot LNG prices in international market, natural gas trading margin improved by 141 bps YoY and 120 bps QoQ due to Rupee depreciation. However petchem margin contracted by 524 bps QoQ, may attribute to lower supply of domestic natural gas, thereby cost of operation increased. Other income increased by 284% QoQ to Rs 2.8 bn while interest exp increased by 76 % QoQ to Rs 1.08 bn. Valuation: We believe that GAIL would be able to overcome constraints on gas supply shortages and maintain growth due to dominant market position in gas transmission as well as diversified business model. We expect the growth to resume post 2HFY14, with new supplies from the LNG terminals at Kochi, Dahej and incremental gas in the KG basin from RIL and ONGC. Further cap on number of subsidized LPG cylinders and hike in diesel prices are positive for the stock. Further Government is considering exempting Gail from sharing subsidy burden. If it happens, GAIL FY15 EPS would increase significantly to Rs. 50 (current estimates Rs. 37). At CMP Rs. 343, GAIL trades at a P/E of 9.3x FY15e earnings estimates, which is lower than its historical PE of 14x. We maintain our BUY rating with SOTP based target price of Rs. 390.

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