We had highlighted in our recently published “Wall of Worry” (dated 20 January 2011), the uncertainty arising from the production decline in RIL’s KG-D6 block. In recent interaction, the RIL management has not provided any update on recovery in KG-D6 production. Not having further clarity on the matter, we have decided to recognize the current production from KGD6 as an indicator of production in the near term. We have also moderated our subsequent ramp up assumption and now model KG-D6 production at 55/60mmscmd as against 60/80mmscmd for FY12/FY13.
RIL management indicated that reservoir studies are being conducted in KG-D6 to understand its characteristics/behavior better. While the two other key stakeholders, viz., DGH and Niko Resources have made public statements with positive guidance on production, we prefer to err on the side of caution. Till such time we do not get clarity, we will keep our expectations of production at the reduced level of 55/ 60mmscmd for FY12/13.
Given the uncertainty in RIL’s KG-D6 volumes, we are cutting our gas transmission assumptions for GAIL. As against our earlier assumption of 134/161mmscmd transmission volumes for FY12/13, we now assume 134/146mmscmd. We believe there will be no upward revision in tariff by PNGRB for GAIL’s new pipelines because the Board has considered ramp-up schedule of 60% to 100% of contract carrier capacity (75% of total capacity) in the first five years.
We now model transmission volumes of 134/ 146mmscmd (v/s 134/161mmscmd earlier) in FY12/13 for GAIL. We are cutting our FY13 EPS estimates for GAIL by 9% to factor cut in the transmission volumes marginally moderated by increase in petchem prices. Stock trades at 11.5x FY13E EPS of Rs33. We are reducing our SOTP based target price to Rs477 (earlier Rs514/share). We downgrade our stock recommendation on GAIL to Neutral. Petronet LNG is our preferred bet to play the gas theme.