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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