The petrochemical cycle downturn and lower oil prices are likely to pull down Gail’s earnings from FY09E levels for these two businesses. We expect EBITDA of petrochemicals to fall 67% and that of LPG/liquid hydrocarbon business to drop 51.4% in FY10E.
We expect EBITDA from natural gas transportation and trading to grow above 15% CAGR led by higher volumes from RIL’s KG basin gas and Petronet LNG’s expanded capacity. However, overall profits through FY11E will remain below FY09E levels.
GAIL currently trades at P/E of 10.4x FY09E and 14.8x FY10E EPS. The stock appears expensive in comparison to peer valuations, historical forward P/E, DCF and SOTP value.
Given the de-growth in estimated earnings and rich valuations, we recommend SELL on the stock.
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