Estimates tweaked on basis of FY17 results and changes in macro assumptions; robust growth in earnings and inexpensive valuation make stock attractive.
In the analyst meet, GAIL management reinforced its optimism on (i) placement of US LNG volumes, (ii) medium-term growth in gas demand, (iii) possible overhaul in tariff mechanism and (iv) higher utilisation of petchem plant. We tweak estimates factoring in FY2017 results and changes in macro assumptions, and raise target price to Rs 435 from Rs 425 on rollover. Robust earnings growth and inexpensive valuation keep us positive. US LNG impact, a key risk, is adequately factored in our estimates.
Recap of FY17 results at meet GAIL ended FY2017 with an EPS of Rs 22.4 (+72% y-o-y), adjusted for (i) Rs 1.5 bn of one-off gratuity provision related to pay revision, (ii) Rs 1.7 bn of write-back related to gas marketing in other income, (iii) Rs 7.8 bn of write-off related to RGPPL and (iv) Rs 4.8 bn of gains on MGL stake sale. The company also provided for Rs 940m of likely recurring increase in employee costs in Q4FY17. Upward revision in tariffs resulted in Rs 3.6 bn of recurring gains in gas transmission segment.
Sanguine on US LNG contracts: GAIL management attempted to allay concerns on US LNG contracts, indicating (i) overseas sales and swaps of 1.5 million tons for CY2018, (ii) substitution of ~4 million tons of current short-term and spot supplies, (iii) 3 million tons of demand from five fertiliser plants (iv) possibility of more shipping swaps to reduce costs. The company indicated US LNG off-take of 4 million tons in CY2018.
Medium-term growth in gas demand: GAIL management expects strong growth in gas demand over the medium term, driven by off-take from new fertiliser plants, increase in penetration of CGD sector, increase in last-mile connectivity for small industries and possibility of government-aided LNG consumption in power sector.
Plausible overhaul in tariffs mechanism: GAIL indicated possibility of implementation of postal tariffs by government, which will result in uniform tariff for all consumers in each integrated pipeline network and likely higher realisations for it.
Update on subsidiaries/JVs: GAIL Gas reported a strong profit of Rs 1 bn in FY2017. BCPL reported loss of Rs 6 bn in FY2017. Konkan LNG demerger from RGPPL is expected to complete soon.
We revise EPS estimates to Rs 27 (+2.7%) in FY2018 and Rs 28.8 (+0.4%) in FY2019, factoring in (i) details of FY2017 results, (ii) higher crude price of $60-65/bbl (+2.5-5/bbl), (iii) stronger rupee and (iv) other minor changes. Our reverse valuation implies stock is trading at inexpensive 11.7 X gas business profits, adjusted for valuation of investments and commodity segments.