In the past four years, GAIL Indias gross block has almost doubled to ~Rs 40,000 crore. Despite a 4x increase in gas trading Ebit (~20% of FY13 Ebit vs 7% in FY09), its overall RoCE declined to 19% in FY13 (vs 25% in FY09) due to under-utilization (50% in FY13) of its gas pipeline network, led by lower gas availability.
We expect the situation to improve after FY17, when new gas sources will add meaningful volumes. FY13 standalone PAT is up 10% y-o-y, but consolidated PAT is down ~2% y-o-y as Ratnagiri Gas and Power (RGPPL) reported a loss of Rs 120 crore/ vs profit of Rs 360 crore in FY12 (including one-time gain of Rs 200 crore).
CGD joint ventures and PLNG now contribute 9% of consolidated PAT; however, we do not expect any meaningful contributions from other subsidiaries in the medium term.
Commissioning of GAILs petchem capacity doubling to 900kt is expected in 1HCY14. However, the likely doubling of domestic gas price from April 2014 will impact companys petchem and LPG business in FY15E. With an increase in gas price, we do not rule out the possibility of lower subsidy burden for GAIL (if FY15 subsidy is reduced to nil, then EPS to see an upgrade of Rs 6).
Events to watch out are subsidy sharing, clarity on transmission volume ramp-up and commissioning of petchem expansion. Though we like managements strategy to build capacity, we expect GAILs medium-term earnings to remain subdued, led by headwinds on incremental gas availability. Adjusted for investments, the stock trades at 8.3x FY15E EPS of Rs 30.1. Our SOTP-based fair value estimate is Rs 344/share. Maintain neutral.