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MOSL: GAIL (Neutral) - Reported numbers below estimates led by multiple one-offs - Gas volume headwinds continue




Motilal Oswal Securities Ltd.


12 Aug 2014





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GAIL 1QFY15: Reported numbers below estimates led by multiple one-offs; Gas volume headwinds continue (GAIL IN, Mkt. Cap USD8.1b, CMP INR390, TP INR410, 5% Upside, Neutral) Reported numbers below estimates, led by several one-offs: GAIL reported 1QFY15 EBITDA at INR10b (est. INR14.9b; -31% YoY, -24% QoQ) led by (a) INR2.4b one-time impact of tariff cut by PNGRB, (b) INR260m loss in gas trading segment and (c) higher subsidy by INR1.5b at INR5b. Reported PAT stood at INR6.2b (est. INR8.2b; -23% YoY, -36% QoQ). Adjusted for one-time tariff cut, INR1.9b trading loss (to be recouped in 2QFY15) and depreciation, adjusted PBT is largely in-line. Segmental Analysis: One-offs, shutdown impact profitability Gas transmission EBIT stood at INR2.2b (est. INR4.3b; -60% YoY, -14% QoQ) due to one-time impact of INR2.4b (~INR0.2b recurring impact) of tariff cut by PNGRB. Transmission volumes stood at 97mmscmd (-2% YoY, +2% QoQ). Gas trading EBIT loss stood at INR355m (v/s avg. INR395m positive EBIT in FY14). Reported loss is due to operational issues which forced GAIL to pre-sell APM gas leading to INR1.9b under recovery, which shall be recovered in 2QFY15. Despite higher petchem realization at INR114/kg (est. INR109/kg), EBIT was below estimate at of INR1.2b (est. INR2.6b; -73% YoY, -36% QoQ) due to lower sales volume at 87KT (est. 115KT; -28% YoY, -19% QoQ). LPG and liq. HC EBIT (pre subsidy) at INR10b (est. 5.7b) is above estimate, led by higher realizations at USD909/MT (est. USD850/MT). 1QFY15 subsidy of INR5b ad-hoc; model INR14b in FY15E GAIL’s subsidy share stood at INR5b (v/s INR7b in 1QFY14 and INR5b in 4QFY14). Other income at INR2b (est INR1.3b; +104% YoY, -60% QoQ) was boosted by INR0.6b gain from favorable decision against its case with GSPC. Valuation and view; Clarity of subsidy sharing remains critical Key events to watch out for: 1) Impact of scheduled hike in domestic gas price as and when implemented; 2) transmission volume increase, and 3) Clarity on subsidy sharing. We model FY15and FY16 subsidy at INR14b and INR9b respectively. We cut our FY15 EPS by 8% and FY16 by 4% to factor in likely lower trading gains and lower transmission tariffs. The stock trades at 9.8x FY16E EPS of INR32. Our SOTP based fair value stands at INR410/sh (v/s INR425 earlier). Neutral.

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