By Motilal Oswal Retail Research
GAIL is currently trading at 1-year forward P/E of 8.7x a ~38% discount to its 10-year long-term average of 14x. This underperformance has been mainly on the back of concerns on possible restructuring of business segments, lower than expected results and recent AGR related demand from the DoT.
However, we believe GAIL would be a key beneficiary of the increasing domestic gas and LNG production. Tightening norms on industrial pollution should also help the transmission segment in longer run. The stock trades at an attractive valuation of 8.3x P/E and 1.0x PBV on FY22. It has maintained strong dividend payout of ~35% in FY19, yielding 3.2% per share.
We expect EBIDTA CAGR of ~14% over FY20-22, with FY22 EV/EBITDA of 5.4x. Transmission segment should remain a major contributor to EBIDTA (~45% share), with volumes growing to ~135mmscmd in FY22. We value the stock at 8x FY22 P/E and add contribution from the investment, to arrive at a target price of Rs 152/share (implying upside of ~28%). Maintain ‘buy’.
ONGC’s KGDWN-98/2 (likely to ramp up to ~14mmscmd) by FY22 and production from RIL’s R-cluster, Satellite fields and MJ field (expected to contribute ~30-35mmscmd) by FY23, will boost transmission volumes of GAIL. Considering that most potential users in KG basin are power plants that may not be able to take high cost KG basin gas, even 70% routing of KG basin gas to west coast, it could increase transmission volumes by 30%. Also, as India flexes its muscle against industrial pollution, adoption of natural gas by industries bodes well for gas transporters like GAIL.
GAIL has hedged sufficient US cargoes for FY20/FY21; but it remains to be seen how these US contracts will work in an environment of increasing LNG supply glut. Completion of three fertilizer plants on the Jagdishpur-Haldia pipeline (expected to commence operations from 2021), combined with the contribution from Matix/ Ramagundam fertilizer plants’ start-up and Mangalore Chemicals and Fertilizers (MCFL) conversion, would further decrease (~60%) concern on the sale of US LNG HH contracts.