United States

Analyst Research Report Snapshot


MOSL: GAIL (Neutral) - EBIT below est due to higher gas cost in LPG/Petchem segment




Motilal Oswal Securities Ltd.


28 Oct 2013





Companies referenced:


Available for Immediate Download

GAIL (India) (GAIL IN, Mkt Cap USD7.1b, CMP INR344, Neutral) Harshad Borawake (HarshadBorawake@MotilalOswal.com) / Kunal Gupta (Kunal.Gupta@MotilalOswal.com) Operationally below estimates; PAT in-line 2QFY14 segmental EBIT at INR12.7b (down ~2% YoY and QoQ) was below our est. of INR15.4b, led by high gas cost (increased share of high cost LNG) in LPG (EBIT loss at INR2.2b v/s est profit of INR1.1b) and Petchem segment (EBIT at INR3.9b v/s est INR5b). This was partially negated by higher gas trading EBIT of INR4.9b (v/s est of INR3.2b. Nevertheless, PAT was in-line at INR9.2b (-7% YoY, +13% QoQ) led by higher other income at INR2.8b (est INR1.8b) and tax rate at 29% (est 34%). FY14 subsidy capped at INR14b, GAIL to represent for FY15 waiver GAIL management indicated that, MoPNG has in-principle agreed to provisionally cap GAIL’s FY14 subsidy at INR14b, implying 2HFY14 subsidy to be nil. We believe the final decision will be post Finance Ministry consent. Higher gas cost led by LNG impacts segmental EBIT; concern for FY15 too Share of LNG in LPG production is >50% now, v/s nil in FY13, while new petchem capacity (FY15 start) will also depend on LNG. We estimate gas cost increase of 18% in FY14E (31% in INR terms) and 19% in FY15 due to higher share of LNG; likely doubling of domestic prices in FY15. Valuation and view; Clarity of subsidy sharing remains critical We increase our FY14 EPS by 9% to factor lower subsidy at INR14b v/s INR29b; partially negated by higher gas cost. We cut our FY15 EPS by 3% to account for higher gas cost, partially negated by lower subsidy (INR14b now v/s INR19.5b). In-principle approval to provisionally cap GAIL’s FY14 subsidy is a significant positive and a step in the right direction in our view. However, increasing share of high cost LNG, partly negates the benefit. If FY15 subsidy were to be nil (v/s INR14b in base case), then our EPS would be upgraded by ~20% (INR7/sh). While we expect the stock to react positively due to the subsidy capping, we maintain our Neutral rating due to operational concerns in terms of (1) low near-term visibility of transmission volumes, (2) concerns on profitability of new expanded petchem capacity which will be on LNG. The stock trades at 9.6x FY15 EPS of INR28. Our SOTP based fair value stands at INR361/sh (at 10x FY15 EPS v/s 9x earlier due to lowering of subsidy concerns).

Why buy analyst research?

  • Institutional quality research
  • Available for Immediate Download
  • Detailed company or industry insight
  • Print or save
  • 24 hour customer support
Return to previous page without adding this item to your cart.
Email Customer Support.

About Analyst Research

Analyst research reports are available for immediate download after purchase. You will have unlimited access to the report for 24 hours after purchase, to download, print or save it as many times as you wish. Analyst Research provided by Reuters does not constitute investment advice, and is not endorsed by Reuters Research. This information is protected by copyright and intellectual property laws. More information on Analyst Research.