GAIL INDIA LTD : GAS & BEYOND !!!

Scrip Code: 532155 / GAIL

CMP:  Rs. 345.80; Buy at current levels.

Medium to Long term Target: Rs. 398.50; STOP LOSS – Rs. 318.00; Market Cap: Rs. 43,863.95 Cr; 52 Week High/Low: Rs. 395.85 / Rs. 272.20

Total Shares: 126,84,77,400 shares; Promoters: 72,74,05,675 shares – 57.35 %; Total Public holding: 54,10,71,725 shares – 42.65 %; Book Value: Rs. 191.00; Face Value: Rs. 10.00; EPS: Rs. 28.59; Div: 96%; P/E: 12.09 times; Ind. P/E: 8.86; EV/EBITDA: 7.50

Total Debt: Rs. 8,364.52 Cr; Enterprise Value: Rs. 57,918.79 Cr.

GAIL INDIA LTD: The Company was incorporated on 16 August of 1984 and is based in New Delhi, India. The Gas Authority of India Ltd. (GAIL) is one of India's leading Public Sector Enterprises, initially established as a wholly owned Company of the Government of India with 100 % equity held by the Government of India and is the largest gas transmission and marketing company in the Country. It is now one of the 'Navratna' enterprises and is ranked among the top ten companies in India. The equity pattern in the Company has also changed and the Government today holds about 67 % of the equity in the Company. GAIL (India) Limited is a gas utility company in India. The Company’s products include natural gas, liquid hydrocarbons, liquid petroleum gas transmission, petrochemicals, city gas distribution and power. The Company serves the retail sector of natural as by supplying green and clean fuel (CNG) and PNG to domestic and commercial sector. The Company has a joint venture with Vododara Mahanagar Sewa Sadan (VMSS). The Company’s operating segments include Natural Gas Transmission, natural gas trading, petrochemicals, LPG and other liquid hydrocarbons and other segments. Its supplies of natural gas include fuel t power plants and feedstock for gas fertilizer plants. The company produces LPG through fractionation, known as Straight Run (SR). It manufactures and markets downstream HDPE & LLDPE from natural gas cracking at its Pata (Uttar Pradesh state, India) unit. In addition, it operates approximately 400 compressed natural gas retail outlets; and provides piped natural gas to domestic, commercial, and industrial applications, as well as has participating interests in 31 exploration blocks in Mahanadi, Mumbai, Cambay, Assam-Arakan, Tripura Fold Belt, Gujarat Kutch, Krishna Godavari, Cauvery, and Cauvery Palar basins. Further, the company leases bandwidth as a carriers' carrier through its optic-fiber network of approximately 13,000 kilometers; and generates electric power through a joint venture. It owns approximately 9,500 kilometers of natural gas pipelines; 2 LPG pipelines covering 2040 kilometers; 7 gas processing plants for production of LPG and other liquid hydrocarbons; and a gas based integrated petrochemical plant for producing polymer. The Company’s segments include Transmission services, Natural Gas Trading, Petrochemicals, LPG and other Liquid Hydrocarbons, City Gas Distribution and Un-allocable. The Company is marketing Gas Processing Unit’s (GPU’s) products namely Liquefied Petroleum Gases (LPG), Propane, Pentane, Naphtha and by-products of polymer plant namely MFO, Propylene & Hydrogenated C4 Mix. The Company’s subsidiaries include GAIL Gas Limited, Brahmaputra Cracker and Polymer Limited, GAIL Global (Singapore) Pte. and GAIL Global (USA) Inc. In September 2011, the Company incorporated a wholly owned subsidiary GAIL Global (USA) Inc. The company is locally compared with Petronet LNG, Indraprastha Gas ltd, Gujarat Gas Company, NTPC Ltd, GVK Power & Infra ltd, KSK Ebergy Ventures Ltd, Adani Power Ltd, Gujarat Industries Power Company Ltd and globally compared with Hokkaido Gas Co Ltd of Japan, China Gas Ltd of Hong Kong, Nippon Gas Co Ltd of Japan, Agl Resources Inc of New York, Wgl Holdings Inc of New York, Delta Natural Gas Co Inc of USA, New Jersey Resources Corp of USA.

Investment Rationale:

GAIL (India), a natural gas company is into exploration, production, processing, transmission, distribution and marketing of natural gas. It now has a turnover of more than Rs. 47,300 crore. The state-owned gas major has a market share of 78 % in natural gas transmission and 70 % in marketing with plans to double up the existing transportation capacity in the next two to three years. It has 27 oil and gas exploration blocks and 3 coal bed methane blocks. GAIL (India) Limited, is India's flagship Natural Gas company, integrating all aspects of the Natural Gas value chain (including Exploration & Production, Processing, Transmission, Distribution and Marketing) and its related services. In a rapidly changing scenario, the company spearheading the move to a new era of clean fuel industrialization, creating a quadrilateral of green energy corridors that connects major consumption centres in India with major gas fields, LNG terminals and other cross border gas sourcing points. GAIL is also expanding its business to become a player in the International Market. GAIL produces million tonnes of LPG. Its 1,922 km LPG transmission pipeline connects the western, northern, and southern part of India and has capacity to transport 3.8 million metric tonnes per annum (MMTPA) of LPG. It also produces propane, pentane and naphtha. It has a joint venture with Gujarat State Petroleum Corporation and Gujarat State Energy Generation where it has an installed capacity of 156 MW. GAIL also has a joint venture with NTPC, Indian financial institutions (IFIs) and MSEB Holding Company, Ratnagiri Gas and Power (RGPPL), which has power generation capacity of 2,150 MW. It has optic fibre network extending over 13,000 km across 200 cities. It leases this network for SCADA, ERP and ISP services to telecom operators including Hutch, Tata Communications, Airtel, Idea Cellular, Tata Teleservices, and Reliance Communications and others. GAIL has a total of 31 exploration blocks in basins such as Mahanadi, Mumbai, Cambay, Assam - Akaran, Tripura Fold Belt and Cauvery. In these blocks it has partnered with companies like ONGC, GSPC, OIL India, Hardy Exploration & Production, Petrogas, JOGPL, Daewoo, OVL, IOC, Korea Gas Corporation, Hallworthy, BPCL, HPCL and Silverwave. The Company also has 70 % equity share in Brahmaputra Cracker and Polymer Limited (BCPL) which is setting up a 2,80,000 TPA polymer plant in Assam. GAIL is a co-promoter with 17 % equity stake in ONGC Petro-additions Limited (OPaL) which is implementing a green field petrochemical complex of 1.1 MMTPA Ethylene capacities at Dahej in the State of Gujarat. GAIL has 31.52 % stake along with NTPC as equal partner in JV Company, RGPPL at Dabhol which operates largest gas based power generation facility in the country and is also setting up 5 MMTPA LNG terminals. GAIL has achieved an overall physical progress of 91 % and financial progress of 73 % till end-FY13. Company has an equity investment of Rs. 1,270 Cr and the project enjoys capital subsidy of 52 %.  

Outlook and Valuation:

GAIL (India) Ltd is India's flagship Natural Gas Company, engages in the exploration and production and also in processing, transmission, distribution, and marketing of natural gas. The Indian Oil and Gas (O&G) sector is one of the six core industries of India and contributes over 15 % to the Gross Domestic Product (GDP). The country is the sixth largest consumer of oil in the world and the ninth largest crude oil importer. The sector is of immense importance to the economy because of its significant forward integration with many other sectors. India is committed to boosting its growth in the years to come and this progress would translate into the country’s energy needs growing many times. The need of the hour, therefore, is to channelise all efforts on exploration of new blocks effectively as well as efficiently. The growing demand for crude oil and gas in the country coupled with policy initiatation is a key. Going forwards GAIL is currently doubling its petchem capacity from 450ktpa to 900ktpa at an estimated capex of Rs. 8,100 Cr. The capacity is expected to be mechanically complete by December 2013 and assuming six months of stabilization period, it is expected that its capacity can be commercially operational by 1QFY15E. GAIL is a gas-based petchem producer and its gas cost is fixed unlike fluctuating costs for naphtha-based producers. However, the Indian government’s decision to increase domestic gas price from April 2014 would adversely impact GAIL’s Petchem business profitability.  As company’s internal gas consumption comprises of both PMT and APM, and as a price hike is expected only in APM gas, it is seen that the gas could cost around USD6.7/mmbtu from FY15E as against $5 as of now and APM gas price to increase to $8.4/mmbtu. It is expected that GAIL’s earnings to remain subdued in the medium term as headwinds on incremental gas availability continue. GAIL’s 1QFY14 subsidy burden is seen at Rs. 700 Cr. In the wake of scheduled increase in domestic gas price from Aril 2014, if the Government were to remove GAIL from subsidy sharing, then based on assumptions the estimated net advantage for Gail comes at Rs. 6/share. Adjusted for investments, the stock trades at 9.41x FY15E EPS of Rs. 38.25. On SOTP-based fair value estimate is Rs. 398.50 per share. In my view GAIL could post EPS of Rs. 38.25 for FY14E & Rs. 44.67 for FY15E and one can ACCUMULATE the stock and would advise investors to use declines in the stock to buy with a long term view, I would buy GAIL INDIA LTD with a Medium to Long term investment for an price target of Rs. 398.50 and off course with a strict stoploss of 8 % on every purchases.

SOTP VALUATIONS 

Business Subsidiary	Value Per Share (₹)
Gas Transmission	160.00
Gas Trading	67.00
Petrochemicals	113.00
LPG & Liquid HC	46.00
E&P Upside	21.00
Other Investments	46.00
Enterprise Value	453.00
Less: Net Debt	54.50
Equity value	398.50
TARGET PRICE	398.50

KEY FINANCIALS	FY13	FY14E	FY15E	FY16E
SALES (₹ Crs)	47,300.00	58,100.00	88,400.00	1,00,100.00
NET PROFIT (₹ Cr)	4,000.00	4,500.00	4,900.00	5,700.00
EPS (₹)	31.71	35.49	38.25	44.67
PE (x)	10.50	9.30	8.70	7.40
P/BV (x)	1.70	1.50	1.40	1.20
EV/EBITDA (x)	7.50	6.60	5.90	4.80
ROE (%)	17.50	18.90	16.90	17.60
ROCE (%)	13.90	14.10	13.30	14.80

I would buy GAIL INDIA LTD for Medium to Long term target of Rs. 398.50. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or ₹ 318.00 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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