INDUSTRY OIL & GAS CMP (as on 14 Dec 2016) Rs 419 Target Price Rs 515 Nifty 8,182 Sensex 26,603 KEY STOCK DATA loomberg GAIL IN No. of Shares (mn) 1,268 MCap (Rs bn) / ($ mn) 532/7,869 6m avg traded value (Rs mn) 862 STOCK PERFORMANCE (%) 52 Week high / low Rs 456/290 3M 6M 12M Absolute (%) 8.6 12.3 23.1 Relative (%) 14.8 11.5 17.4 SHAREHOLDING PATTERN (%) Promoters 56.64 FIs & Local MFs 20.15 FIIs 14.94 Public & Others 8.27 Source : BSE Satish Mishra satish.mishra@hdfcsec.com +91-22-6171-7334 Deepak Kolhe deepak.kolhe@hdfcsec.com +91-22-6171-7316 Ready for take-off GAIL faced challenging times during FY14-16 given the plunge in gas volumes and lower profits in petchem/lpg segments (lower realisation and higher gas cost). As a result, EBITDA and PAT have declined 20% and 25% CAGR over the period. FY17 is turning to be a complete turnaround year for GAIL. There will be boost in profitability across all segments led by (1) Lower RLNG/domestic gas prices will improve profits of petchem/lpg. Strong crude prices will lead to firm realisations for petchem and LPG. However, their RM (gas) costs will remain muted owing to the global glut, (2) Increase in gas transmission volumes on account of power pooling and higher demand from petchem plant, (3) Likely upward revision in network tariff as actual volumes in the past five years were lower than anticipated, and (4) Strong marketing margins at lower gas prices. We expect EBITDA and PAT to grow at a CARG of 22% and 24% over FY16-19E. Our SOTP target is Rs 515/sh (~7.2x FY19E standalone EV/EBITDA and Rs 125/sh from investments). Maintain BUY. COMPANY UPDATE 14 DEC 2016 GAIL BUY Key Highlights Gas prices to remain muted: There will be ~50% jump in global LNG liquefaction capacities over the next 3- years. We expect the fight for market share to be very intense and gas prices to remain muted for long period. Transmission tariffs should rise: Network tariffs for bigger pipelines were calculated in 2010. Gas volume assumptions during that time were higher from KG-D6. However, actual volumes are much lower. We expect increase in tariffs in the next revision (expected soon). Petrochem profits to jump: GAIL has doubled its PE capacity. Robust domestic demand, muted LNG prices and strong crude prices, all will work in favour of GAIL. Key risk: GAIL has tied up for 5.8 mtpa of LNG from US. In the current scenario, it will be unviable to bring them to India. GAIL has swapped 2-mtpa volumes and has further raised tender for 2-mtpa. Every $ 1/mmbtu loss on 1-mtpa volumes will lead to a PBT loss of ~$ 50mn. Near-term outlook: We expect positive news flows to continue related to pipeline tariffs and ramp-up of new petchem facility. Stock will outperform broader market. Financial Summary (Standalone) (Rs bn) FY14 FY15 FY16 FY17E FY18E FY19E Net Sales 575.08 567.42 519.14 470.83 559.96 651.53 EBITDA 67.01 46.96 42.68 62.79 71.97 77.33 APAT 41.34 29.95 22.99 34.29 40.50 43.47 Diluted EPS (Rs) 32.6 23.6 18.1 27.0 31.9 34.3 P/E (x) 12.9 17.7 23.1 15.5 13.1 12.2 EV / EBITDA (x) 9.1 13.1 13.9 9.2 7.9 7.2 RoE (%) 16.1 10.7 7.7 10.7 11.6 11.6 Source: Company, HDFC sec Inst Research HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Middle East and Asia have seen fastest production growth over the last two decades Rising supply from USA and Australia will change global demand-supply balance Global natural gas prices to remain muted Current global demand-supply balance Natural gas accounts for ~24% of the total global energy requirement. Total global gas consumption in 2015 was 3,469 BCM (~9,500 mmscmd). Global gas consumption has increased at a CARG of 2.3% over 2005-15. It was primarily driven by non- OECD countries (3.4% CAGR), whereas growth in OECD countries was 1.1%. Share of gas consumption in North America, Europe and Eurasia has declined from 83% in 1990 to 57% in 2015. The Middle East, Africa and Asia Pacific have seen the fastest growth in production. Share from these three geographies has increased from 16% in 1990 to 39% in 2015. New discoveries with low extraction challenges in the Middle East made it the largest LNG supplier in the world. Rising energy demand and lower domestic availability made Asia Pacific the largest market for RLNG. Africa will further change demand-supply dynamics in future with newer discoveries in Mozambique and Tanzania. India accounts for 1.5% of global gas consumption vs. production of 0.8%. Region wise gas production 100% 80% 60% 40% 20% 0% North America Europe ME and Africa 8 10 12 14 9 16 16 11 14 18 22 23 33 28 25 24 21 19 15 13 14 13 11 9 32 34 32 27 26 28 1990 1995 2000 2005 2010 2015 Source: BP, HDFC sec Inst Research Region wise gas consumption 100% 80% 60% 40% 20% 0% North America Europe ME and Africa Source: BP, HDFC sec Inst Research S. and Cent. America Eurasia Asia Pacific S. and Cent. America Eurasia Asia Pacific 8 10 12 7 15 18 20 9 10 13 30 16 24 21 18 19 17 14 19 19 20 20 18 15 33 35 33 28 27 28 1990 1995 2000 2005 2010 2015 Page 2
LNG trade movement (CY15) I M P O R T E R S E X P O R T E R S (BCM) US Trinidad & Tobago Peru Europe Russia Qatar Other ME Other Africa Nigeria Australia Indonesia Malaysia Total Imports North America - 3 3 1-1 0-2 - 0-10 S. & C America 0 10-3 - 2 0 1 4 - - - 20 Europe & Eurasia 0 2 1 3-28 0 13 8 - - - 55 ME & Africa 0 1-2 - 6 1 1 2 1 0 0 15 Asia Pacific 0 1 0 2 15 69 19 7 12 39 21 34 239 China - 0-0 0 7 0 1 0 7 4 4 26 India - 0 0 1-14 1 1 3 1 0 0 22 Japan 0 0 0 0 10 20 11 2 6 26 9 21 118 Taiwan 0 - - 0 0 9-0 0 0 3 3 19 South Korea - 0-0 4 16 6 1 2 3 5 5 44 Total exports 1 17 5 11 15 106 20 21 28 40 22 34 338 Source: BP, HDFC sec Inst Research NG trade movement through pipeline (CY15) I M P O R T E R S (BCM) US Canada S & C America Europe Russia Turkme nistan E X P O R T E R S Other CIS Iran Qatar Algeria Other Africa Myanmar North America 50 74 0 - - - - - - - - - - 124 S. & C America - - 18 - - - - - - - - - - 18 Europe - - - 199 159-7 7-21 6 - - 401 CIS - - - 9 33 3 17 1 - - - - - 63 Middle East - - - - - 7 0-20 - - - - 27 Africa - - - - - - - - - 4 5 - - 9 Asia Pacific - - - - - 28 2 - - - - 13 18 61 Australia - - - - - - - - - - - - 6 6 China - - - - - 28 2 - - - - 4-34 Total 50 74 19 208 193 38 26 8 20 25 11 13 18 704 Source: BP, HDFC sec Inst Research Current balancing equations: 1. Russia supplying to Europe 2. Middle East supplying to Europe and Asia 3. North America is self sufficient with no surplus Other A.Pac. Total Page 3
Jump in LNG liquefaction capacities LNG liquefaction capacities will increase by ~50% over the next three years Large gas reserves in US, Australia, and Africa led to spurt in proposal for LNG liquefaction facilities. The total proposals were of ~750 mtpa additional LNG liquefaction facilities. However, many projects remained in the planning stage post the fall in global gas prices and weak macros. Realistically, it is expected that only ~20% of proposed capacities will come online over the next five years. However, even this will lead to ~50% jump in total capacities. Australia, Middle East and USA will have large LNG liquefaction facilities. LNG liquefaction terminal data for 2015 Capacity (mtpa) Production (mtpa) Utilisation (%) Addition (mtpa) Capacity (mtpa) in 2021 Qatar 77 78 101% - 77 Australia 33 30 90% 54 87 Indonesia 27 19 70% 1 27 Algeria 25 12 48% - 25 Malaysia 24 25 105% 6 30 Nigeria 22 20 93% - 22 Russia 10 11 114% 17 26 USA 2 0 22% 62 64 Others 83 53 64% 3 85 Total 302 248 82% 142 443 Source: BP, IGU, TOTAL, Industry reports, HDFC sec Inst Research, Note: 1 mtpa = ~1.36 BCM of gas Middle East and Russia will face biggest challenge in maintaining their market share Changing global natural gas balance 1. Australian facilities will target Asian markets, which are currently getting serviced from Middle East 2. US capacities will target European market, which is currently serviced from Russia and Middle East. 3. Russia and Qatar will be majorly hit with changing equations. Russia will not easily let go it s market. 4. An eminent gas price war is on cards. Russia cannot afford war on both crude and gas together. Hence, we expect them to cooperate in keeping crude price strong and stable. 5. Gas prices to remain muted for a long period. LNG charter distance and time From To Country Distance (NM) Days USA India 11,163 27 USA Italy 6,556 16 USA Spain 5,564 14 Qatar Spain 5,295 13 Qatar India 1,477 4 Qatar Italy 5,121 13 Qatar Japan 8,023 20 Australia (E) Japan 4,153 10 Australia (W) Japan 15 Source: Industry reports, HDFC sec Inst Research Page 4
In the worst-case, every $ 1/mmbtu loss on 1-mtpa volumes will lead to a PBT loss of ~US$ 50mn for GAIL Risk associated with GAIL-US LNG deals GAIL has tied up for 5.8 mtpa of LNG from USA. Details are Dominion Cove Point - 2.3 mtpa and Cheniere Sabine Pass 3.5 mtpa. These LNG supplies will start from 2017 and are bound by take-or-pay agreements. Prices of LNG coming from Qatar (linked to crude prices) have corrected sharply. This makes LNG coming from USA (linked to Henry-hub prices) unviable in India owing to higher freight cost. Landed cost of LNG from USA will be ~US$ 8.5/mmbtu (assuming HH price of US$ 2.6/mmbtu) vs. landed cost of ~US$ 6/mmbtu from Qatar. However, GAIL is trying to swap these volumes with volumes flowing form Middle East to Europe. So far, GAIL has been able to swap 2 mtpa of volumes and has further raised tender for swapping another 2 mtpa. We believe that GAIL will be able to swap their volumes. Qatar s LNG volumes are at biggest risk, as they will face competition from both USA and Australian players. In the worst-case, every US$ 1/mmbtu loss on 1-mtpa volumes will lead to a PBT loss of ~US$ 50mn for GAIL. Page 5
Transmission pipeline tariff set to rise Network tariffs for bigger pipelines were calculated in 2010-11. During those time, outlook of natural gas volumes were robust in India. In the calculation of network tariffs, pipeline utilisations are assumed at 60%, 70%, 80%, 90% and 100% respectively in the first five years. Gas volume assumptions made during prevision tariff calculations were high. We expect increase in tariffs in the next revision GAIL s transmission pipeline tariff details FY16 Submitted by Gail Approved (Rs/mmbtu) (Rs/mmbtu) Applicable Last Tariff Operating Pipelines Gas flow Capacity FY FY FY FY FY FY From Order Date (mmscmd) Util. (%) 08-15 15-16 16-17 08-15 15-16 16-17 Cauvery Basin network 2.7 32 7.47 43.58 43.58 7.47 7.47 17.41 25-May-16* Hazira-Vijaipur-Jagdishpur -I 33.1 62 35.39 25.46 20-Nov-08 9-Jun-10 Dahej-Uran-Panvel-Dhabhol 9.5 48 40.16 24.65 20-Nov-08 4-May-11 K.G. Basin network 4.9 31 5.56 180.77 180.8 5.56 5.56 45.32 15-Mar-16* Agartala regional network 1.5 65 11.51 5.8 20-Nov-08 1-May-12 Chhainsa-Jhajjar-Hissar 0.8 15 4.16 53.23 53.23 4.16 4.16 7.85 29-Jul-16* Dahej-Vijaipur-Dadri 25.5 47-53.65 1-Apr-10 9-Jun-10 Dadri-Bawana-Nangal 4.1 13 11.85 62.3 62.3 11.85 11.85 14.04 29-Jul-16* Mumbai regional network 6.2 88 10.74 3.49 20-Nov-08 12-Mar-12 Kochi-Bangalore-Mangalore 0.6 10 28.99 86.02 86.02 28.99 28.99 42.79 8-Jul-16* Dabhol-Bangalore 1.0 6 44.65 73.51 73.51 44.65 44.65 40.83 8-Jul-16* Source: PNGRB, Company, HDFC sec Inst Research * Tariffs are revised recently Actual gas volumes flowing through these pipelines were much below the assumed volumes. This was primarily due to sharp fall in gas volumes from KG-D6. Even current volumes are much below the full capacity. These tariffs are revised every five years. Revisions for most of the bigger pipelines are due. We expect a sharp revision in pipelines tariff. Increased tariffs will add directly to GAIL s PBT. We have assumed 5-10% increase in pipeline transmission tariffs over FY16-18. However, we believe that there is significant upside risk to our assumptions. In some of the recent revisions, pipeline tariffs were significantly revised upward. Page 6
Petrochemicals profits will increase PE: Indian demand-supply scenario PE : Capacity and utilization in India Currently ~42% on Indian PE demand is met through imports Polyethylene (PE) capacities in India were constant at 2.9 mtpa over the last five years. RIL, GAIL, IOCL and HPL are key PE players in India. HPL (Haldia Petrochemicals) was operating at lower utilisation due to working capital funding issues. PE consumption in India has grown at a CAGR of ~7% over FY10-15. However, production has grown only at a CAGR of ~5%. This has made India a net importer of polyethylene. Import share in total consumption has increased from 14% in FY08 to 42% in FY15. 3.5 3.0 2.5 2.0 1.5 1.0 0.5 - PE Capacity Utilisation (%) mtpa 68% 81% 82% 84% 78% 2.9 2.9 2.9 2.9 2.9 FY11 FY12 FY13 FY14 FY15 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Domestic PE capacities will almost double over the next 3-years However, over the next 2-3 year the demand-supply scenario will reverse in India. Indian players are almost doubling the total PE capacity. PE Capacities coming in India (mtpa) Companies Existing Add Total % Mix RIL 1.1 1.0 2.1 37% GAIL 0.4 0.6 1.0 18% HPL 0.7-0.7 12% IOCL 0.7-0.7 11% OPAL - 1.0 1.0 18% BCPL - 0.2 0.2 4% Total 2.9 2.8 5.7 100% Source: CPMAINDIA, OPAL, HDFC sec Inst Research GAIL will further benefit as it uses gas as feed for petchem. Gas prices are likely to remain muted owing to the global glut. Whereas finished product, petchem realisations are likely to remain strong along with the crude prices. Source: Ministry of Chemicals & Fert., HDFC sec Inst Research PE: Production and imports in India Production Net Import Consumption 5.0 mnt 3.6 3.6 3.9 4.0 3.1 3.2 3.0 2.7 1.2 1.2 1.6 2.3 2.4 0.8 1.1 2.0 0.3 0.5 1.0 1.0 2.0 2.0 1.7 2.0 2.3 2.4 2.4 2.3 - FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Source: Ministry of Chemicals & Fert., HDFC sec Inst Research Page 7
Indian PE demand-supply balance is likely to remain healthy Global imbalance will happen post 2018, when ethane based capacities get commissioned in US Additional capacities of RIL and GAIL will be operational in FY18. However, there is still some ambiguity on timeline of OPAL. There may be a short period of surplus supply in India. However, we do not expect it to last long owing to the robust domestic demand. In the upcoming capacities HDPE/LLDPE are 2.4 mtpa and remaining 0.4 mtpa in LDPE. GAIL is present only in HDPE/LLDPE. HDPE/LLDPE demand to match capacity HDPE and LLDPE account for ~88% of the India s total polyethylene consumption. Different studies by Assocham and GAIL suggests that demand of PE in India will rise at a CAGR of ~8% over the next few years. Indian will again become net importer of polyethylene in the two years time even if all planned capacities come online. Indian PE Demand scenario in the coming years (mtpa) FY16 FY17E FY18E FY19E FY20E Demand HDPE 2.2 2.4 2.6 2.8 3.0 LLDPE 1.4 1.5 1.7 1.8 1.9 Total Demand 3.6 3.9 4.2 4.5 4.9 Total Capacity 2.6 3.9 4.1 4.3 4.5 Surplus/(deficit) (1.0) 0.0 (0.1) (0.2) (0.4) Source: GAIL, Assocham, HDFC sec Inst Research Global ethylene demand supply scenario Global ethylene demand increased by 3.6% YoY to 141 mnt in 2015. Around 61% of global ethylene is consumed in the production of polyethylene. Naphtha is raw material for ~44% of global ethylene production. Ethane accounts for ~36% and remaining are manufactured using propane/butane/others. Global ethylene capacity utilisation improved marginally to 89% in 2015, sustaining above the fiveyear average of 86%. Global ethylene supply demand is expected to remain tight in the medium-term. The new capacities in USA (based on low cost ethane) will get commissioned in 2018. This may lead to pressure in global market for 1-2 years. However, Indian players will be least impacted as India will have minimal surplus capacity. Global Ethylene: Demand-Supply Source: RIL, IHS, HDFC sec Inst Research Page 8
Factoring increase in transmission and trading volumes Gradual ramp-up of new petchem capacity utilisation Assuming no subsidy sharing by GAIL Increase in TP from Rs 505/sh to Rs 515/sh is mainly due to higher value from listed investments Assumptions FY13 FY14 FY15 FY16 FY17E FY18E FY19E TRANSMISSION Gas Volumes (mmscmd) 105 96 92 92 100 108 118 Tariff (Rs/scm) 0.9 1.1 0.9 1.1 1.2 1.2 1.2 LPG Volumes (kt) 3,136 3,145 3,094 2,819 2,875 2,933 2,992 Tariff (Rs/kg) 1.3 1.3 1.4 1.7 1.7 1.7 1.7 SALES Traded Natural Gas (mmscmd) 82 79 72 74 81 87 95 Realisation (US$/mmbtu) 5.5 6.4 6.0 5.6 4.3 4.7 5.1 EBITDA Margin (Rs/scm) 0.47 0.55 0.26 0.54 0.50 0.50 0.50 Petrochemicals (kt) 427 445 441 334 540 765 855 Realisation (US$/t) 1,611 1,685 1,704 1,384 1,381 1,381 1,381 EBITDA margin (US$/t) 734 574 82 (195) 229 307 301 LPG (kt) 1,075 1,030 1,040 856 831 831 831 Other LHC (kt) 296 277 237 230 216 216 216 OTHERS Subsidy Contribution (Rs bn) 26.9 19.0 10.0 - - - - Source: Company, HDFC sec Inst Research SOTP Valuation (Based On FY19E) (Rs bn) Multiple EV (Rs bn) Value/sh Basis Gas Transmission 34.5 9.0 310 245 x FY19E EBITDA LPG Transmission 2.8 9.0 25 20 x FY19E EBITDA Gas Trading 14.6 5.5 80 63 x FY19E EBITDA Petchem 14.2 5.5 78 62 x FY19E EBITDA LPG & Other Hydrocarbons 6.7 5.5 37 29 x FY19E EBITDA Standalone wt avg 7.2 Less: Net Debt (36.8) (37) (29) As on Mar-18 Standalone Value 390 Investments ONGC 0.8 51 40 20% disc. to CMP Petronet LNG 0.8 29 22 20% disc. to CMP IGL 0.8 22 17 20% disc. to CMP MGL 0.8 20 15 20% disc. to CMP Others 1.0 38 30 1x BV Value Per Share 515 Source: HDFC sec Inst Research Page 9
Change in FY18 estimates factoring delay in increase in transmission tariffs Change In Estimates (Rs bn) FY18 Old FY18 New % Ch Revenues 546.94 559.96 2.4 EBITDA 73.49 71.97 (2.1) APAT 41.53 40.50 (2.5) EPS 32.7 31.9 (2.5) Source: HDFC sec Inst Research (Rs bn) FY19 Old FY19 New % Ch Net Sales 644.02 651.53 1.2 EBIDTA 77.14 77.33 0.2 APAT 43.34 43.47 0.3 AEPS 34.2 34.3 0.3 Peer Valuations Mcap (Rs bn) CMP (Rs/sh) Reco. TP (Rs/sh ) EPS (Rs/sh) P/E (x) P/BV (x) ROE (%) FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E Reliance Inds. 3,433 1,060 BUY 1,225 88.0 103.1 117.7 12.0 10.3 9.0 1.3 1.2 1.1 11.3 12.0 12.3 ONGC 2,612 305 NEU 310 21.4 21.4 23.8 14.3 14.3 12.8 1.6 1.5 1.5 11.7 11.1 11.7 Indian Oil Corp 1,453 299 BUY 370 32.4 34.2 36.4 9.2 8.7 8.2 1.7 1.5 1.4 19.9 18.6 17.6 BPCL 897 621 NEU 680 45.1 52.6 58.3 13.8 11.8 10.6 2.9 2.5 2.1 22.3 22.5 21.6 Gail India 532 419 BUY 515 27.0 31.9 34.3 15.5 13.1 12.2 1.6 1.5 1.4 10.7 11.6 11.6 HPCL 441 434 BUY 515 36.8 40.2 40.5 11.8 10.8 10.7 2.1 1.9 1.7 19.1 18.5 16.7 Petronet LNG* 285 380 BUY 415 20.2 25.3 29.9 18.8 15.0 12.7 3.8 3.2 2.7 22.0 23.4 23.4 OIL India 269 447 BUY 470 35.9 35.3 36.6 12.5 12.7 12.2 1.2 1.1 1.1 9.4 8.9 8.9 Indraprastha Gas 122 870 NEU 850 40.7 44.3 49.3 21.4 19.6 17.7 4.3 3.7 3.2 21.6 20.1 19.2 Source: Company, HDFC sec Inst Research * Consolidated Page 10
Standalone Income Statement (Rs bn) FY15 FY16 FY17E FY18E FY19E Net Revenues 565.69 516.14 467.68 556.65 648.06 Growth % (1.2) (8.8) (9.4) 19.0 16.4 Raw Material 67.24 38.26 34.82 47.30 55.94 Gas Trading 403.48 384.48 316.39 376.57 451.81 Employee Cost 9.06 9.96 11.11 12.38 13.81 Other Expenses 40.67 43.76 45.73 51.73 52.65 Operating Profits 45.24 39.68 59.64 68.66 73.86 Operating Profit Margin (%) 8.0 7.7 12.8 12.3 11.4 Other Operating Income 1.73 3.00 3.15 3.31 3.47 EBITDA 46.96 42.68 62.79 71.97 77.33 EBITDA Margin (%) 8.3 8.2 13.3 12.9 11.9 EBITDA Growth (%) (29.9) (9.1) 47.1 14.6 7.4 Depreciation 9.74 13.13 14.28 15.72 16.87 EBIT 37.22 29.55 48.51 56.25 60.46 Other Income (Including EO Items) 9.24 8.58 13.53 8.80 8.96 Interest Cost 3.61 6.40 5.49 5.49 5.49 PBT 42.84 31.73 56.55 59.56 63.93 Taxes 12.45 8.74 17.36 19.06 20.46 RPAT 30.39 22.99 39.18 40.50 43.47 EO (Loss) / Profit (Net Of Tax) 0.44-4.89 - - APAT 29.95 22.99 34.29 40.50 43.47 APAT Growth % (27.5) (23.2) 49.2 18.1 7.3 AEPS 23.6 18.1 27.0 31.9 34.3 Source: Company, HDFC sec Inst Research Standalone Balance Sheet (Rs bn) FY15 FY16 FY17E FY18E FY19E SOURCES OF FUNDS Share Capital 12.68 12.68 12.68 12.68 12.68 Reserves And Surplus 278.51 293.16 321.32 348.78 378.27 Net Worth 291.20 305.85 334.00 361.47 390.95 Long-term Debt 78.14 57.81 57.81 57.81 57.81 Short-term Debt 17.41 23.36 23.36 23.36 23.36 Total Debt 95.56 81.18 81.18 81.18 81.18 Net Deferred Taxes 33.09 40.47 40.47 40.47 40.47 Long-term Provisions & Others 26.58 16.99 16.99 16.99 16.99 Total liabilities 446.42 444.48 472.63 500.10 529.59 APPLICATION OF FUNDS Net Block 277.60 287.46 298.18 317.47 335.59 CWIP 43.60 34.03 29.03 24.03 19.03 Investments 43.22 45.34 45.34 45.34 45.34 LT Loans And Advances 34.46 44.39 44.39 44.39 44.39 Other Non-current assets 24.10 11.16 11.16 11.16 11.16 Total Non-current Assets 422.98 422.38 428.10 442.39 455.51 Inventory 20.81 17.45 19.22 22.88 26.63 Debtors 30.95 27.28 27.88 33.18 38.63 Cash And Cash Equivalent 11.42 18.06 35.28 44.42 56.60 Loans And Advances 35.12 32.79 32.79 32.79 32.79 Other Current Assets 7.66 11.99 11.99 11.99 11.99 Total Current Assets 105.95 107.56 127.15 145.24 166.64 Creditors 33.20 28.62 25.78 30.68 35.72 Other Current Liabilities & Provns 49.30 56.84 56.84 56.84 56.84 Total Current Liabilities 82.51 85.46 82.62 87.53 92.57 Net Current Assets 23.45 22.10 44.53 57.72 74.07 Total Assets 446.42 444.48 472.63 500.10 529.59 Source: Company, HDFC sec Inst Research Page 11
Standalone Cash Flow (Rs bn) FY15 FY16 FY17E FY18E FY19E Reported PBT 42.84 31.73 56.55 59.56 63.93 Non-operating & EO Items (3.71) (2.05) (13.53) (8.80) (8.96) Interest Expenses 3.61 6.40 5.49 5.49 5.49 Depreciation 9.81 13.14 14.28 15.72 16.87 Working Capital Change (19.57) 6.16 (5.26) (4.10) (4.21) Tax Paid (8.55) (7.04) (17.36) (19.06) (20.46) OPERATING CASH FLOW ( a ) 24.44 48.35 40.17 48.81 52.66 Capex (16.39) (13.43) (20.00) (30.00) (30.00) Free Cash Flow (FCF) 8.05 34.92 20.17 18.81 22.66 Investments (0.34) (2.12) - - - Non-operating Income 8.61 8.58 8.64 8.80 8.96 Others (1.53) (3.14) - - - INVESTING CASH FLOW ( b ) (9.64) (10.11) (11.36) (21.20) (21.04) Debt Issuance/(Repaid) (9.11) (16.34) - - - Interest Expenses (3.61) (6.40) (5.49) (5.49) (5.49) FCFE (4.67) 12.17 14.68 13.32 17.17 Share Capital Issuance - - - - - Dividend (13.32) (8.40) (10.99) (12.98) (13.94) Others (3.84) (0.57) - - - FINANCING CASH FLOW ( c ) (29.89) (31.71) (16.48) (18.48) (19.43) NET CASH FLOW (a+b+c) (15.09) 6.52 12.33 9.13 12.19 EO Items, Others (0.00) 0.12 4.89 - - Closing Cash & Equivalents 11.42 18.06 35.28 44.42 56.60 Source: Company, HDFC sec Inst Research Standalone Key Ratios FY15 FY16 FY17E FY18E FY19E PROFITABILITY % EBITDA Margin 8.3 8.2 13.3 12.9 11.9 EBIT Margin 6.6 5.7 10.4 10.1 9.3 APAT Margin 5.3 4.4 7.3 7.2 6.7 RoE 10.7 7.7 10.7 11.6 11.6 Core RoCE 8.1 6.5 10.1 11.5 11.7 RoCE 7.8 6.5 8.8 9.6 9.6 EFFICIENCY Tax Rate % 29.1 27.5 30.7 32.0 32.0 Asset Turnover (x) 1.4 1.2 1.1 1.2 1.3 Inventory (days) 13 12 15 15 15 Debtor (days) 20 19 22 22 22 Other Current Assets (days) 28 31 35 29 25 Payables (days) 21 20 20 20 20 Other Current Liab & Provns (days) 32 40 44 37 32 Cash Conversion Cycle (days) 8 3 7 9 10 Net Debt/EBITDA (x) 1.8 1.5 0.7 0.5 0.3 Net D/E 0.3 0.2 0.1 0.1 0.1 Interest Coverage 12.7 6.0 10.4 11.8 12.6 PER SHARE DATA EPS (Rs) 23.6 18.1 27.0 31.9 34.3 CEPS (Rs) 31.3 28.5 38.3 44.3 47.6 DPS (Rs) 6.0 5.5 7.4 8.8 9.4 BV (Rs) 229.6 241.1 263.3 285.0 308.2 VALUATION P/E (x) 17.7 23.1 15.5 13.1 12.2 P/Cash EPS (x) 13.4 14.7 10.9 9.5 8.8 P/BV (x) 1.8 1.7 1.6 1.5 1.4 EV/EBITDA (x) 13.1 13.9 9.2 7.9 7.2 EV/Revenue (x) 1.1 1.1 1.2 1.0 0.9 OCF/EV (%) 4.0 8.1 7.0 8.6 9.5 FCFF /EV (%) 1.3 5.9 3.5 3.3 4.1 FCFE/M CAP (%) (0.9) 2.3 2.8 2.5 3.2 Dividend Yield (%) 1.4 1.3 1.8 2.1 2.2 Source: Company, HDFC sec Inst Research Page 12
RECOMMENDATION HISTORY GAIL 600 550 500 450 400 350 300 250 200 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 TP Sep-16 Oct-16 Nov-16 Dec-16 Date CMP Reco Target 6-Jan-16 373 NEU 400 9-Feb-16 349 NEU 380 27-May-16 380 BUY 460 8-Sep-16 389 BUY 475 15-Nov-16 436 BUY 505 14-Dec-16 419 BUY 515 Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period Page 13
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