Gas volumes disappoint: Transmission volumes fell sharply q-o-q to 99 mmscmd, from 105 mmscmd in Q3, led by the continued decline in KG-D6 volumes (19 vs. 24 mmscmd), lower Dahej LNG volumes (96% vs. 110% utilisation), delay in commissioning of Kochi (now expected in July), and minimal volumes at Dabhol (meaningful contribution only from Oct).
Q1 volumes are unlikely to see a meaningful uptick as KG-D6 volumes have continued to fall, which should offset a potential pick-up at Dahej. Gas trading Ebitda of R3.49 bn was ahead sequentially (R3.0 bn in Q3) despite lower marketing volumes due to higher trading margins, while petchem Ebitda (+7% q-o-q) was also ahead of expectations. LPG segmental Ebitda was, however, down 16% q-o-q despite lower subsidy due to poorer realisations.
Subsidy surprises positively: Q4 subsidy of R5.87 bn was below the quarterly run rate of R7.0 bn and surprised positively, due to some last-minute adjustments in the final subsidy figures for the year, the benefits of which accrued to GAIL. Full-year subsidy share came in at R26.9 bn for FY13, 16% below the R31.8 bn figure for FY12. Future subsidy, however, remains a key imponderable for GAIL, especially in the likely event of an APM (administered price mechanism) gas-price hike.
Maintain Neutral: Near-term earnings growth for GAIL remains muted and positive catalysts seem elusive with APM gas prices likely to be raised and KG gas volumes continuing to decline. While valuations (10x and 1.4x adjusted P/E and P/Bprice-to-earnings & price-to-book value) appear reasonable and the stock has underperformed 23% over the past year, we would await a better entry point before turning more constructive on the stock.
Valuation & risks: Our DCF (as on Sep-13e) primary valuation methodology yields a target price of R361 (including R95 value of investments). We believe some risks on GAILs core businesses have been mitigated as clarity on new tariffs has alleviated concerns, while simultaneously the cyclical businesses have become less critical for the companys growth.
The key downside risks to our target price for GAIL are: (i) its petrochemical business is cyclical; (ii) changes in governments policy relating to oil sector subsidies will likely remain a risk to earnings and stock sentiment; (iii) execution risks, given the large investments that it is undertaking in expanding its pipeline network, could lead to time and cost over-runs; (iv) slower than expected ramp-up in gas volumes from new supply sources; and (v) regulation of marketing margins.
The key upside risks to our target price are: (i) faster than anticipated ramp up of domestic gas supplies; (ii) early ramp-up of the Dabhol and Kochi LNG terminals; (iii) implementation of reforms in the downstream oil sector by the government; (iv) resetting of pipeline tariffs at higher than expected rates; and (v) no upward revision in APM gas prices by the government.