Quoting GAIL’s chairman, reports indicate GAIL expects Rs8 billion additional revenue (he is referring to EBIT, we believe) on transmitting 40 million cubic metres per day of RIL’s KG D6 gas.
On 80 million cm per day, it expects earnings to rise to Rs16 billion. If allowed to market D6 gas, it expects a further Rs2.5 billion in earnings.
GAIL’s projections are devoid of any actual calculations: gas volumes it might actually get to transmit, pipelines through which it could actually transmit and tariffs it might actually realize over the transmission length.
GAIL, we believe, has merely extrapolated current EBIT of Rs16 billion on transmission volumes of 82 million cubic metres a day to arrive at the above quoted estimates.
Thus, actual revenue and potential profitability have to be seen in the context of volumes and destinations that GAIL actually gets for the transport of the D6 gas.
Further, on Rs2.5 billion estimated trading earnings, (in case GAIL gets to market D6 gas) the contribution to profit would be about 6 – 8% in FY10-11e.
We expect a 4% CAGR in earnings over FY08-11. We have a HOLD recommendation on the stock, with a target price of Rs220, based on a sum-of-parts valuation: business on a DCF basis; investments and cash at market prices. Key risks are regulatory, tariffs and transmission volumes.