Upgrade GAIL to ‘buy’ from ‘add’ with a sum-of-the-parts (SoTP) based target price of Rs 400 per share.
We expect the company to benefit from an upward revision in regulated tariffs, higher gas volumes, lower domestic gas price and recovery in crude price. The stock offers a good entry point pricing in key negatives, as we see the possibility of partial usage of spot LNG as feedstock for petchem and negotiation on RasGas contract, which can allay key overhangs.
We have revised our EPS estimates to R20.2 (-1%) in FY16, R25.9 (-3.1%) in FY17 and R31.6 (-2.1%) in FY18 to reflect details from FY15 annual report, lower crude price assumptions by $2.5-5 per barrel, 10-20% proportion of spot LNG in raw material for petchem segment and weaker rupee-US dollar exchange rate forecasts of KIE economists.
We have assumed nil subsidy burden from FY16 onwards. Our FY17 EPS will increase by R2-3, if we assume about 10-15% increase in GAIL’s blended tariffs from upward revision in regulated tariffs. On the other hand, our EPS estimates will decline by R0.9 in FY16 and R1.8 in FY17, if we were to build in interest cost for contractual advance to RasGas pertaining to 20% shortfall in off-take volumes.
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