GAIL India, being the largest natural gas transmission player in the domestic market, accounts for almost 85% market share, with about 82mmscmd gas transmitted during FY2008.
Domestic natural gas availability is expected to rise significantly over the next 2-3 years owing to the RIL KG Basin gas, rising output from ONGC and JV fields and LNG imports. The company has been investing heavily towards augmenting its infrastructure to ride this opportunity.
GAIL currently boasts of over 7,000 km of gas transmission network, which is primarily located on the Western and Northern part of India and plans to invest over Rs20,000 crore over the next 4-5 years to expand its network.
It is also investing in the E&P segment to secure gas supplies for its LPG and petrochemical segments.
Concerns and valuation
Subsidy sharing is so far the biggest concern for GAIL. During FY2008, it shared a subsidy burden of Rs1,314 crore compared to Rs1,488 crore in FY2007, which boosted its overall performance.
With soaring crude oil prices the government recently announced a bail-out package for the OMCs wherein it capped the overall upstream share at Rs45,000 crore for FY2009. GAIL’s share in total upstream subsidies is around 7%. Any increase beyond this level will take a toll on the company’s performance.
At the CMP of Rs341, the stock is available at 8.5x FY2010E EPS of Rs40 and P/BV of 1.7. Historically, the stock is trading in the range of 9-12x. We assign a PE of 11x to GAIL India. Based on this, the fair price works out to Rs440, which is closer to our SOTP target price.
We are positive on the long-term prospects of the company and recommend a BUY and target price of Rs447.