IIFL's view on India Natural Gas Sector, GAIL
Release Date: 2011-06-15
IIFL has come out with its positive report on India Natural Gas sector and has recommended buy rating for GAIL, GSPL, Indraprastha Gas and Petronet LNG in its June 14, 2011 research report.India’s primary energy basket is on the threshold of witnessing a quantum jump in contribution from natural gas. While the demand for gas has always been strong in the country, availability of transmission infrastructure and regulatory issues has restricted supply matching up to the demand growth. However, the medium term outlook has improved considerably with 1) increased availability of gas; both domestic and imports, 2) huge investments in gas pipeline infrastructure and 3) fast pace implementation of related reforms.
Improved domestic availability of natural gas: Recently, concerns have been raised with respect to sustenance of current level of gas production in the country given the declining trend of gas production from Reliance Industries’ KG-D6 field. However, we believe that in the near term, higher LNG imports will offset the impact to some extent, while over the medium to longer term; production at KG-D6 would revive. Furthermore, in the next three to five years, new fields such as GSPC’s Deendayal field, ONGC’s KG Basin field and Reliance Industries NEC-25 field are expected to commence production. Higher LNG import capacities with LNG terminals of Petronet, Shell and Dabhol project will also add to the supply. As per GAIL, domestic production of gas will increase from about 145mmscmd in CY10 to about 215mmscmd by CY15.
Better pipeline infrastructure: Lack of adequate pipeline infrastructure has always been a key hindrance in meeting the rising demand for natural gas, especially so in the southern and eastern regions. Going ahead, GAIL, which transports more than 70% of gas available in the country, has embarked upon an aggressive capacity expansion program to double its transmission capacity over the next three years from about 8,000kms currently. Companies such as GSPL and Reliance Gas Infrastructure are also adding material capacities in the near future.
Reforms have gathered pace: Realizing the importance of gas sector, the Indian government has over the past five years, implemented significant reforms such as i) raising APM gas prices and bringing them closer to market price, ii) regulating pipeline tariffs, iii) streamlining processes for awarding CGD projects and many more. Furthermore, the government is contemplating implementation of gas price pooling, which would even out the prices for end consumers.
GAIL INDIA
In a recent move, the government raised the contribution of upstream companies in the subsidy sharing pattern from 33% to 38%. However, amongst the upstream companies GAIL’s contribution reduced from 9.2% in FY10 to 7% in FY11. While the uncertainty would continue to persist on account of subsidy burden incidence, GAIL’s annuity like business of transmission (50% of the EBIT) provides better relative earnings visibility when compared with other oil PSUs. We recommend BUY with a price target of Rs 525.
Gujarat State Petronet (GSPL)
With annuity like cash flows for GSPL, we prefer to value the company on DCF basis. We value its extant pipelines at Rs 88/share considering a stable transmission tariff of Rs 0.8/scm. Increase in transmission tariffs would result in higher valuations. Further, we value its 52% stake in the three cross-country pipelines at Rs 25/share taking the total valuations to Rs 113/share. Recommend BUY.
Indraprastha Gas
We believe IGL has strong earnings visibility considering rapid conversions of private vehicles to CNG and increasing usage of gas in industries. Superior pricing power will enable them to sustain margins and strong return ratios. Recommend BUY with a 9-month price target of Rs 409 (P/E of 15x FY13E EPS).
Petronet LNG
We expect the company to generate robust operating cash flows over the next three years based on strong volume growth. However, capital expenditure related to Kochi terminal will keep the company free cash flow negative until FY13. Considering strong earnings growth expectations in the near term, we prefer to value Petronet on PE basis. We assign a P/E of 16x to FY13E EPS of Rs 10.1, arriving at a target price Rs 162. We recommend BUY.
| Type: | NORMAL |
| Company: | GAIL |
| Country: | 印度 |
| Url: | http://www.moneycontrol.com/news/recommendations/iifls-viewindia-natural-gas-sector_557469.html |