Buy GAIL India - Sharekhan

GAIL India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs541
Current market price: Rs392

Long-term supply agreement improves growth visibility

Event

GAIL has signed a 20-year sales and purchase agreement (SPA) with Sabine Pass Liquefaction LLC, a unit of Cheniere Energy Partners, for the supply of 3.5 million tonne per year of LNG. The SPA has a term of 20 years starting from the date of first commercial delivery in CY2017 with an option to extend for another ten years.

Impact

The SPA will help GAIL to ensure long term gas supply for the growing demand. Though execution of this SPA will be in 2017, which is five years ahead, we believe considering domestic demand supply assurance is certainly a positive for the stock.

View and valuation: Reiterate Buy

The impact of this event is likely to be felt only in the long term, ie post CY2017. It certainly is a positive development for GAIL as it provides better visibility of LNG supply in the long term. Moreover, it should act as a positive as GAIL's new pipeline network is likely to face low utilisation in the initial years considering the current gas supply condition.

We retain our estimates and Buy rating on the stock with a target price of Rs541 (based on sum of the parts [SoTP] valuation).

Source : Equity Bulls

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