Hold Gail India Ltd - Result Update: Maintaining our view - Karvy Stock Broking

(GAIL IN, HOLD, Mkt Cap: US$9,364mn; CMP: Rs370; TP: Rs381; 3% Upside)

GAIL reported flat bottom-line sequentially as 11% increase in transmission tariff and 5% lower subsidy burden was offset by 4% QoQ dip in petchem EBIT and 82% QoQ dip in other income. Transmission and trading volumes were flat on account of lack of incremental gas sourcing opportunities. Marketing margins grew by 13% on account of reduction in gas supply from KGD6. Weaker rupee could not fully avert drop in global polymer prices sequentially. Subsidy burden was lower sequentially despite ~50% rise in under recoveries of OMCs, as the company likely provided for its share of burden on cooking fuels only.

Our Outlook

We expect the bottom-line to be under pressure in near term on account of debt laden aggressive capex for core business as against limited volume visibility. Further dip in KGD6 volumes could downgrade our earnings estimates. We expect petchem and marketing margins to peak at current levels.

Sluggish transmission volumes and shrink in petchem spreads leave little to cherish about core businesses. Skepticism over increasing subsidy share of upstream companies will stay as an overhang on LPG segment. Moreover, positive surprise in upstream business would be early and speculative to factor in. We have adjusted our FY12E earnings for Q3FY12 and will review our earnings estimates on any eminent update in post result concall (scheduled tomorrow) and further clarity over subsidy sharing mechanism. We retain "HOLD" rating on the stock maintaining our earnings estimates for FY13E and FY14E and our SOTP based target price of Rs. 381/share. We maintain our view as regard to no scope of further rerating on the stock and restricted upsides.

Source : Equity Bulls

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