Published on 26/06/2019 11:01:13 AM | Source: Motilal Oswal Services Ltd

Neutral GAIL India Ltd For The Target Rs.350 - Motilal Oswal

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Huge miss on petchem and LPG/Liq. HC; concerns on US LNG contracts

* 4QFY19 EBITDA of INR16.8b was lower (-40% est., -1% YoY, -37% QoQ) due to poor performance in petchem & LPG/liq HC segments. Adj. for impairment of INR3.2b, PAT came in at INR14.4b (-19% est., +43% YoY, - 16% QoQ). Impairment was on account of the Dabhol LNG terminal (~INR1.7b) and GAIL Gas Global (~INR1.5b).

* Reported PAT came in at INR11.2b (-37% est., +10% YoY, -33% QoQ), despite higher other income at INR8.7b (v/s INR2.8b in 4QFY18 and INR2.2b in 3QFY19). Depreciation was higher at INR4.6b (+27% YoY, +26% QoQ).

* For FY19, EBITDA was up ~25% YoY at INR95.3b with reported PAT at INR60.3b (+30% YoY).


Operational details:

* Gas transmission volume was in line with estimate at 109mmscmd (+3% YoY, +1% QoQ). For FY19, transmission volumes were at 107mmscmd (+2% YoY).

* Petchem sales were at 213mmt (+12% YoY, +23% QoQ), though higher cost and lower realization at INR81/kg (-6% YoY, -13% QoQ) resulted in lower EBITDA. Petchem sales stood at 735mmt (+9% YoY) in FY19.


Valuation and view

* GAIL is trading at 11.5x FY20 EPS of INR30.3 and 6.8x FY20 EV/EBITDA. We have used 9x 1-year forward P/E to value GAIL due to concerns on its US LNG contracts.

* Management has guided that fertilizer plants on Jagdishpur-Haldia pipeline would commence operations by 2021, which would further decrease concerns on sale of US LNG. But, we expect significant delays in commencement of operations of the fertilizer plants.

* Additionally, petrochemical margins & LPG realizations are expected to be under stress due to excess supply. Furthermore, PATA continues to witness operational problems.

* We continue to value the stock at 9x FY21 EPS while adding contribution from the investment to arrive at a target price of INR350. Maintain Neutral.


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