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GAIL (GAIL) - Qtr. Update - Dated - August 11, 2014




Axis Capital Limited


12 Aug 2014





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GAIL’s (Bloomberg: GAIL IN) Q1FY15 adjusted PAT at Rs 9.2 bn was higher than our estimate of Rs 8 bn due to positive surprise in LPG EBIT led by 100% allocation of APM gas in the quarter (LNG earlier). Reported PAT was lower at Rs 6.2 bn due to one-off charges: (a) retrospective tariff adjustment of Rs 2.4 bn (largely in Cauvery network) in transmission business; (b) Rs 1.9 bn in gas trading as weak spot LNG market forced GAIL to sell spot LNG at APM (Administered Price Mechanizm) rate. This charge will get reversed in Q2FY15. Strong LPG EBIT may eventually lead to higher subsidy: Strong LPG EBIT at Rs 5 bn implies RoCE of ~250%, which may prompt the government to either allot higher-cost gas to LPG segment or increase subsidy burden on GAIL to provide reasonable RoCEs to the company. Uncertain earnings outlook: GAIL’s earnings risk has increased given lower gas transmission volumes, uncertain subsidy sharing and rising raw material costs for cyclical businesses (LPG and Petchem). Share of trading profit in overall earnings mix has increased drastically, which is volatile and unsustainable. Incremental gas volumes from Dabhol LNG terminal and favorable change in pipelines tariff policy could be key triggers. Maintain HOLD with TP of Rs 390 (nil upside). At CMP of Rs 390, the stock trades at 11x FY15E EPS of Rs 35 and 10x FY16E EPS of Rs 39. Key Assumptions: Crude at US$ 105/ bbl for FY15 and FY16. INR/USD at 60.1 for FY15 and 58.5 for FY16. Regards, Amit Mishra (Sr VP – Energy) amit.mishra@axiscap.in; 91 22 4325 1142 Prashant Tarwadi (VP – Energy) prashant.tarwadi@axiscap.in; 91 22 4325 1113

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