GAIL: Pipeline expansion to continue; Signed term sheets of 100mmscmd demonstrate strong domestic demand
- To continue with scheduled doubling of pipeline infrastructure: Management expects to complete its current pipeline of projects as per schedule, leading to doubling its pipeline capacity from current 150 to 300mmscmd. HVJ-DVPL/GREP expansion project is on schedule and it will be able to transport ~110mmscmd by Apr-11 as against current capacity of 57mmscmd (in line with expectations). No new EoIs (expressions of interest) to construct pipelines are currently being contemplated.
- Positive on policy trigger coming through for increased LNG consumption: GAIL expects government to put in place a pooled pricing mechanism for power and fertilizer sectors to enable increased gas supply to Indian market. However, views on the subject are clearly divided as of now, with NTPC opposing the move while Petroleum Ministry remains keen on implementing this change.
- Positive outlook on gas demand: Expects continuation of the momentum in gas demand, as seen in the rapid offtake of KG gas and in the substantial requests for gas allocation pending with MoPNG. Has signed term sheets with several customers for supplying over 100mmscmd. Expects power generation (including CHPs) to continue driving demand.
- Operational update: Current transmission volumes are at ~117mmscmd. It expects to commission the Dabhol terminal within next 2-3 months. De-bottlenecking and capacity expansion of HVJ-DVPL will get completed by March 2011 resulting in total capacity of 110mmscmd. Gas production from its Myanmar block will commence in FY13/FY14.
- Triggers: 1) Clarity on subsidy sharing; 2) Completion of its 3 new trunk pipelines; and 3) Commencement of LNG imports at Dabhol terminal.
- Valuation and view: Adjusted for investment value, GAIL (GAIL IN, Mkt Cap US$13b, CMP Rs475, Buy) trades at 12.4x FY12E EPS of Rs29.6. We believe there is upside potential to our estimates from higher than expected transmission volumes and lower subsidy. Our SOTP based target price (post 10% discount for subsidy concerns) is Rs527 (14x FY12 core EPS, E&P value of Rs23 and investment value of Rs62). Maintain Buy.