Retain ‘hold’ on Gas Authority of India (GAIL) but lower our target price to R330 (earlier R385) as we adjust for lower oil prices and marginally lower gas volume. We continue to value GAIL on a sum-of-the-parts basis. We value the transmission segment at an 8x EV/ebitda, in line with global peers, and the LPG segment at 6x, which is a mid-cycle multiple, in line with peers. We value investments at a holding company discount of 20% to market prices.
GAIL’s business suffering due to low oil price. GAIL has four main businesses, three of which depend directly on the price of oil. A low oil price therefore is not good for company’s profitability. Note that GAIL has doubled its gas cracker capacity.
We have cut our estimates of the profitability of the LPG and Petrochemical divisions to factor in our reduced oil price assumptions of $55.4 per barrel for CY16e, $60 per barrel for CY17e, $70 per barrel for CY18e, and $80 per barrel for CY19e (versus $62.5 per barrel, $75 per barrel, $90 per barrel and $95 per barrel previously), in line with HSBC’s house view.
We have also lowered our FY16e, FY17e and FY18e gas transmission volume assumptions to 91, 97, and 110 mmscmd, respectively (from 97, 107, and 117). Another overhang is the ongoing dispute with Qatar on take-or-pay obligations due to lower offtake of term volume.
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