Neutral GAIL (India), target Rs 346: Motilal Oswal Financial Services

Motilal Oswal Financial Services has reiterated neutral call on GAIL (India) with a target price of Rs 346.

Shares of GAIL (India) traded at Rs 309.7 around 9:25 am on 3 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

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The Petroleum & Natural Gas Regulatory Board (PNGRB) has announced tariff for the K.G. Basin Natural Gas Pipeline Network (KGBNGPL) at Rs 16.14/MMBtu (metric million British thermal unit) against the proposed Rs 47.20/MMBtu by GAIL.

"As against the current tariff of Rs 45.32/MMBtu, the revised tariff is nearly 65 per cent lower, and would bear a negative impact of 2 per cent on the FY20/21 earning per share (EPS)," the brokerage said.

The pipeline currently handles nearly 5mmscmd (million metric standard cubic meter per day) of volumes, lowering PAT by nearly Rs 150 crore.

PNGRB, in its Mar'16 order, issued final initial tariff for the KGBNGPL pipeline at Rs 45.32/MMBtu against the proposed Rs 180.77/MMBtu by GAIL.

In a letter dated 22 October, 2018, GAIL proposed tariff revision for KGBNGPL at Rs 47.20/MMBtu and an extension of 10 years to the life of the pipeline.

However, PNGRB approved a tariff nearly 65 per cent lower — sharply reduced from the current Rs 45.32/MMBtu to Rs 16.14/MMBtu, effective 1 July, 2019.

Sharp reduction in the revised tariff is on account of huge divergence in opex, future capex, and unaccounted gas loss guidance by GAIL against the PNGRB approval.

The PNGRB recently announced an integrated tariff hike for GAIL’s HVJ and HVJ upgradation pipelines (which together handles nearly 62 per cent of the company’s volumes) to Rs 41.1/MMBtu (against proposed Rs 97.0/MMBtu).

This came in as a dampener for the stock, as the regulator-approved tariff was only nearly 4 per cent higher than the weighted average margin of Rs 39.7/MMBtu.

"We reiterate our Neutral call on GAIL factoring in the aforementioned disappointment, along with rising concerns on other business segments, such as LPG segment profitability due to the expanding global glut, weakness in petrochemical segment due to upcoming global expansions and profitability of US long-term contracts due to declining spot LNG prices," said the brokerage.

The stock is trading at 10.4 times FY20 EPS and 6.2 times FY20 EV/Ebitda.

"We value it at 9 times FY21 EPS adjusted for other income and then adding the value of investments to arrive at a target price of Rs 346 (from Rs 351)," the brokerage added.