Share Trading Tips

GAIL
Reco price: Rs 402
Current market price: Rs 402.05
Target price: Rs 370
Downside: 8%
Brokerage: Ambit Capital

Commencement of KG-D6 gas, concomitant with the Rs 30,000 crore network expansion plan encompassing the addition of 7,000 km of gas pipelines, should result in a 37 per cent CAGR volume growth for GAIL over FY09-FY12. Aided by volume expansion, EBITDA of the transmission business is likely to exhibit 20 per cent CAGR over this period. However, the 3 per cent CAGR of the petrochemical/LPG division is expected to dampen overall performance, given a weak environment.

The brokerage models a flat HVJ tariff based on the assumption of expansion-related capex of Rs 11,000 crore. The brokerage says that its earnings estimates for GAIL would decline by 4 per cent for a 10 per cent reduction in HVJ tariffs. Their subsidy model factors in two-thirds of the upstream share of auto-fuel under-recovery for 2009-10 and 2010-11, a sharing scenario which favour upstream companies.

GAIL is currently trading at 17 times one-year forward PE, almost double of its 5-year historical average. While this valuation premium factors in expectation of robust gas volume growth outlook and higher existing tariffs, earnings growth of 4 per cent CAGR over FY09-FY12 could make it difficult to sustain. The petrochemical/LHC business outlook, too, continues to be grim. The brokerage has initiated a ‘Sell’ rating with a target price of Rs 370