IndiaEquityResearch

Oil&Gas

September18,2010

GAIL(India)

ADD
TargetPrice(INR)

562

CompanyReport
LastPrice(IN R)
Blo o m b er gco d e
Re ut e rs co d e
Avg. Vo l .(3 m )(m n )
Avg. Va l .(3 m )(INRm n)
5 2 w kH/L (I NR)
Se ns e x
MCAP(INRb n/USD b n)
Sharehold in g(%)

03 / 10

Transmissionvolumestocontinuedrivingthebusiness

GAIL is likely to commission over 7,500km of pipeline by end FY13f.

Transmission volumes are likely to have a threeyear CAGR of 19.5%.
480.4
TheproposedpricehikeintheAPMgassuppliedtopetrochemicalsis
GAIL I N
GAIL .BO likely to impact the segments margins in FY12f and FY13f. We
1 .7 3 estimate GAILs share of the subsidy to decline in FY12f and FY13f.
7 84
OverallEBITDAislikelytogrowataCAGRof20.8%duringFY10FY13f.
5 1 7/3 2 4
The capex plan of over INR290bn is likely to dent PAT. We forecast
1 9 ,5 95
GAILs FY13f PAT margin at 11.3%. Based on a DCF fair value of
60 9 .3 1/1 3 .2 9
INR471/shareforthecorebusiness,INR20/sharefortheE&Pbusiness
0 6/ 1 0 andINR71/shareforinvestmentsinlistedentities,wearriveataSep11
5 7. 3 SOTPtargetofINR562.WeinitiatecoveragewithanAddrating.

P r om o te r s

57 .3

MFs ,FIs ,Ba nks

26 .6

2 6. 4

FII s

11 .9

1 2. 4

1 .2
1 .9

1. 4
1. 6

P u bl ic
Ot he rs
Stoc kC h art(Rel at ivetoSen se x)
5 00

Pipelineinfrastructureexpansiontohelpmeetdemand
Oftheover15,000kmofpipelineproposedbyvariousplayers,GAILislikelyto
commission over 7,500km by end FY13f. A number of gas discoveries have
been made in the eastern region, while historic industrial development has
beeninwestIndia;thusthereisneedforanallIndiagastransmissionnetwork.

ThreeyearCAGRof19.5%intransmissionvolumes
Optimistic domestic gas supply is likely to grow at a CAGR of c18%. Power
plants, fertilizer plants and CGD networks are likely to drive demand.
Transmission volumes are likely to increase from 106.5mmscmd in FY10 to
c182mmscmdinFY13f.Thenewtariffregulationisunlikelytoimpacttariffsby
alargeextent.AsharpincreaseinvolumesinFY11fandFY12fislikelytoresult
inmarginalimprovementofthesegmentsEBITmargins.

4 20

3 40

Highergaspricetoresultinlowermarginsinpetrochemicals
2 60
S e p0 9

J a n 10

M a y10

GA IL ( Ind ia )

S e p 10

S ens ex Reba s ed

Stoc kPe rfm.(%)

1m

6m

1 yr

Ab so lu t e

4 .1

1 4. 8

3 6. 8

2 .4

3. 3

1 9. 7

0 3 /1 0

03 / 11 f

03 / 12 f

2 61 ,5 3 5

3 24 ,3 0 4

3 66 ,4 6 3

yo y(% )

10

24

13

EBITDA(% )

18

19

20

31 ,4 2 0

38 ,3 4 5

42 ,3 4 5

1 ,2 6 8

1 ,2 6 8

1 ,2 6 8

2 4 .8

3 0. 2

3 3. 4

13

22

10

Re l.to Sen s ex
Financ ials(INRmn)
Sa le s

A.P AT
Sh o /s (d il ut ed )
A.EP S(INR)
yo y(% )
D /E(x)

0 .2

0. 1

0. 1

P /E(x)

1 9 .4

1 5. 9

1 4. 4

EV/E(x)

1 2 .0

9. 6

8. 8

Ro CE(% )

16

16

14

Ro E(% )

20

21

20

Q uarte rlyTre nd s
Sa le s(INRm n)
P AT(INRm n)

0 9 /0 9

12 / 09

0 3/ 1 0

0 6/ 1 0

6 2, 24 3

6 2 ,0 57

6 5 ,6 9 0

71 ,1 5 8

7, 13 2

8 ,6 00

9 ,1 0 8

8 ,8 6 9

Pleaserefertothedisclaimertowardstheendofthedocument.

Onthebackofhighcrudeprices,petrochemicalpricesarelikelytoremainfirm
for the next two years. Domestic players are likely to be protected by the
freightcost advantage and the duty structure. Gasbased petrochemical
crackers are likely to have a higher advantage as gas prices do not change in
line with crude prices. The proposed price hike in the APM gas supplied to
petrochemicalconsumersislikelytoimpactmarginsinFY12fandFY13f.

Subsidysharingtocontinue;overallEBITDAtoriseataCAGRof21%
LPG and liquid hydrocarbon revenues are likely to grow a CAGR of c4%. EBIT
margins are likely to improve as we estimate GAILs share of the subsidy to
declineinFY12fandFY13f.OverallEBITDAislikelytogrowataCAGRof20.8%
duringFY10FY13f.ThecapexplanofoverINR290bnislikelytodentthePAT.
WeestimatetheFY13fPATmarginat11.3%,downfrom12.0%inFY10.

InitiatewithanAddratingandSep11targetpriceofINR562
BasedonaDCFfairvalueofINR471/shareforthecorebusiness,INR20/share
for the E&P business and INR71/share for investments in listed entities, we
arrive at a Sep11 SOTP target price of INR562. We initiate coverage on the
stockwithanAddrating.

GouriMishra,+9102266842863
gouri.mishra@avendus.com

India Equity Research

GAIL(India)

InvestmentSummary
Ofthe15,000kmofpipelineplannedbyvariousplayers,GAILislikelytocommissionover7,500kmbyendFY13f.Higher
gas consumption by power, fertilizer and city gas distribution networks are likely to drive demand till FY13f.
Transmission volumes for Gail India are likely to increase from 106.5mmscmd in FY10 to c182mmscmd inFY13f. The
proposedpricehikeintheAPMgassuppliedtopetrochemicalconsumersislikelytoimpactthesegmentsmarginsin
FY12fandFY13f.LPGtransmissionvolumesarelikelytogrowataCAGRofc8%.HighermarketingmarginsonAPMgas
are likely to lead to marginal improvement in margins from the gas trading business. LPG and liquid hydrocarbon
revenues are likely to grow a CAGR of c4%. EBIT margins are likely to improve as we estimate GAILs share of the
subsidytodeclineinFY12fandFY13f.WeforecastGAILsEBITDAtogrowataCAGRof20.8%duringFY10FY13.The
capexplanofoverINR290bnislikelytoincreaseinterestcostsandreducethePAT.ThePATmarginislikelytodecline
from12.0%inFY10to11.3%inFY13f.BasedonafairvalueofINR471/shareforthecorebusiness,INR20/shareforthe
E&PbusinessandINR71/shareforinvestmentsinlistedentities,wearriveataSep11SOTPtargetpriceofINR562.We
initiatecoverageonthestockwithanAddrating.

Robustdomesticgasdemandtocontinue
DomesticgasdemandislikelytogrowataCAGRof10.2%tillFY13f.Gasconsumptionbypowerand
fertilizercompaniesandcitygasdistribution(CGD)networksarelikelytodrivedemand.Thegrowthin
domesticgassupplyislikelytooutpacedemandgrowthtillFY13f.However,domesticsupplyisunlikely
tosatiatetheentiredemandandliquefiednaturalgas(LNG)islikelytofillthegap.Wealsoestimate
higher demand for spot LNG as domestic demand is likely to be far higher than supply. Spot LNG is
likely to find more takers as the average gas cost has increased after the increase in APM gas prices
fromUSD1.8/mmbtutoUSD4.2/mmbtu,effective1Jun10.

Pipelineinfrastructureexpansiontohelpmeetdemand
Oftheover15,000kmofpipelineproposedbyvariousplayers,GailIndia(GAIL)islikelytocommission
over 7,500km by end FY13f. Currently, the total trunk pipeline network in the country extends for
c11,070km.Thepipelinesareownedandoperatedbycentralandstatepublicsectorundertakings,and
alsobyprivatecompanies.GAILownsc70%ofthepipeline,whileGujaratStatePetronet(GUJSIN,Add)
ownsc12%.Anumberofgasdiscoverieshavebeenmadeintheeasternregion,whilehistoricindustrial
developmenthasbeeninwestIndia;thus,thereisaneedforanallIndiagastransmissionnetwork.

ThreeyearCAGRof19.5%intransmissionvolumes
Transmissionvolumesare
likelytoincreasefrom
106.5mmscmdinFY10to
c182mmscmdinFY13f.

OptimisticdomesticgassupplyislikelytogrowatathreeyearCAGRofc18%.Anumberofpowerand
fertilizerplantsrequiregas.Moreover,CGDislikelytoflourishoncetheexcessgasfromtheKGbasin
andtheexpandedLNGterminalisavailable.Tobridgethedistancebetweenthesupplyanddemand
centers, expansion of the pipeline network is likely to be critical. Transmission volumes are likely to
increasefrom106.5mmscmdinFY10toc182mmscmdinFY13f.Accordingtothenewtariffregulations,
pipelinetariffwouldbebasedonthe12%posttaxRoCEmethod.Tariffcalculationforthenewpipeline
is based on the minimum utilization rate set by the Petroleum and Natural Gas Regulatory Board
(PNGRB).Asactualcapacityutilizationislikelytobehigherthanthestipulatedutilization,overallRoCE
andIRRfortheprojectislikelytobeinexcessof12%posttax.AsharpincreaseinvolumesinFY11f
andFY12fislikelytoresultinmarginalimprovementinthesegmentsEBITmargins.

Highergaspricetoresultinlowermarginsforpetrochemicals
Proposedpricehikeinthe
APMgassuppliedto
petrochemicalconsumers
islikelytoimpactmargins
inFY12fandFY13f.

Despitecapacityadditionsacrosstheglobe,petrochemicalpricesarelikelytoremainfirmforthenext
two years on the back of higher crude prices and lower utilization at the new petrochemical plants.
Domestic players are likely to be protected by the freightcost advantage and duty structure.
Gasbasedpetrochemicalcrackerswillhaveahigheradvantageasgaspricesdonotchangeinlinewith
crudeprices,andhencehighercrackspreadscanbeachieved.GAILisalsoexpandingitscapacityfrom
c0.4mtpa to c0.8mtpa by FY14f. The proposed price hike in the APM gas supplied to petrochemical

Oil&Gas

India Equity Research

GAIL(India)

consumersislikelytoimpactmarginsinFY12fandFY13f.However,higherpolymerproductionislikely
toincreasetheEBITfromthesegment.

OtherbusinessestoaddtotheEBIT;subsidysharingtocontinue
OverallEBITDAislikelyto
growataCAGRof20.8%
duringFY10FY13f.

LPGtransmissionvolumesarelikelytogrowataCAGRofc8%,whiletransmissionchargesarelikelyto
remainflat.AsGAILhasbeenallowedtochargemarketingmarginsonAPMgas,itislikelytomarginally
improvetheoverallmarginsfromthegastradingbusiness.LPGandliquidhydrocarbonrevenuesare
likely to grow a CAGR of c4%. EBIT margins are likely to improve as we estimate GAILs share of the
subsidytodeclineinFY12fandFY13f.However,continued subsidysharingbyGAILislikelykeepthe
stockfromrerating.ThepresenceinCGDisapotentialupsideforthecompanysrevenues.Inlinewith
the growth in transmission volumes, EBITDA is likely to grow at a CAGR of 20.8% during FY10FY13f.
PATgrowthisunlikelytomatchEBITDAgrowthasnewerassetswouldmeanhigherdepreciation.Also,
thecapexplanofoverINR290bnislikelytorequiredebtfunding,increasinginterestcosts.PATmargin
islikelytodeclinefrom12.0%inFY10to11.3%inFY13f.TheE&Pbusinessislikelytoaddvaluetothe
stockprice.

AddwithSep11targetpriceofINR562
Ourtargetpriceisbased
onaDCFvalueof
INR471/shareforthecore
business,INR20/sharefor
theE&Pbusinessand
INR71/sharefor
investments.

WeuseathreestageDCFtoevaluatethecurrentvalueofthecorebusiness,whiletheE&Pbusinessis
valued on the inplace resources. Based on a fair value of INR471/share for the core business,
INR20/share for the E&P business and INR71/share for investments in listed entities at the current
market price, we arrive at a Sep11 SOTP target price of INR562. The stock has traded in various P/E
bandsoverthepastthreeyears.Presently,itistradingatlessthan14.8xtheoneyearforwardP/E.At
ourtargetprice,itislikelytotradeat15.7xtheoneyearforwardP/EinSep11.Weinitiatecoverageon
thestockwithanAddrating.
Exhibit1: ProjectedoneyearforwardP/E
20

15

10

0
Oct06

Mar07

Sep07

Feb08

Jul08

Jan09

Jun09

Nov09

May10

Oct10

Mar11

Sep11

Source:Bloomberg,AvendusResearch

Exhibit2: Valuationsummary
(INRmn)

NetSales

EBITDA

NetProfit

EPS(INR)

P/E(x) EV/EBITDA(x)

EV/Sales(x)

P/B(x)

Mar09

237,760

40,647

27,928

22.0

22.0

12.9

2.2

4.2

Mar10f

261,535

47,762

31,420

24.8

19.5

12.0

2.2

3.6

Mar11f

324,304

61,276

38,345

30.2

16.0

9.7

1.8

3.1

Mar12f

366,463

71,516

42,345

33.4

14.5

8.8

1.7

2.7

Mar13f

410,439

84,227

46,487

36.6

13.2

8.5

1.7

2.4

Source:AvendusResearch

Oil&Gas

India Equity Research

GAIL(India)

TableofContents

InvestmentSummary ........................................................................................................................ 2
Robustdomesticgasdemandtocontinue ............................................................................................2
Pipelineinfrastructureexpansiontohelpmeetdemand......................................................................2
ThreeyearCAGRof19.5%intransmissionvolumes ............................................................................2
Highergaspricetoresultinlowermarginsforpetrochemicals............................................................2
OtherbusinessestoaddtotheEBIT;subsidysharingtocontinue .......................................................3
AddwithSep11targetpriceofINR562 .................................................................................................3

Robustdomesticgasdemandtocontinue ........................................................................................ 5
CAGRof10.2%indomesticgasdemandfromFY10toFY13 ................................................................5
GrowthindomesticsupplytooutpacedemandtillFY13f ....................................................................5
LNGlikelytoaddressthesupplydeficit ................................................................................................6

Pipelineinfrastructureexpansiontohelpmeetdemand.................................................................. 7
Over11,000kmofdomestictrunkpipelinenetworkexists...................................................................7
Over15,000kmofpipelinenetworkbeingplanned..............................................................................7

ThreeyearCAGRof19.5%intransmissionvolumes......................................................................... 9
Demandgrowthtoremainhighatc301mmscmd.................................................................................9
Expandedpipelinenetworktoopennewavenues ...............................................................................9
Transmissionvolumestofollowthecapacityincrease .........................................................................9
Transmissionvolumestoincreasetoc182mmscmdbyFY13f ............................................................10
Marginstoremainrobust,despiteregulatorychangesfortariffs ......................................................10

Highergaspricelikelytoresultinlowermarginsinpetrochemicals .............................................. 11
Petrochemicalpriceslikelytoremainfirminthemediumterm.........................................................11
Higheraveragegascosttoimpactmargins.........................................................................................11

OtherbusinessestoaddtotheEBIT;subsidysharingtocontinue ................................................. 12
LPGtransmissiontocontinuepostingrobustmargins........................................................................12
Marginalincreaseinnaturalgastradingmargins ...............................................................................12
Subsidyonpetroleumfuelstocontinueimpactingprofits .................................................................13
Potentialupsidefrompresenceincitygasdistribution ......................................................................14
CAGRof21%inEBITDAduringFY10FY13f .........................................................................................14
PATmarginstodecline........................................................................................................................14
E&Pbusinesstoimprovevaluations ...................................................................................................15

InitiatewithanAddratingandSep11targetpriceofINR562......................................................... 16
DCFbasedtargetpriceofINR471/shareforthecorebusiness ..........................................................16
Presentlytradingc15xforwardP/Eneedtoupdate ..........................................................................17
E&PbusinessvaluedatINR20/share...................................................................................................17
InvestmentsvaluedatINR71/share ....................................................................................................18
Sep11SOTPtargetpriceofINR562 .....................................................................................................18
Keyriskstoourestimates ...................................................................................................................18

Annexure:Pipelineprojects............................................................................................................. 19
FinancialsandValuations ................................................................................................................ 20

Oil&Gas

India Equity Research

GAIL(India)

Robustdomesticgasdemandtocontinue
Domestic gas demand is likely to grow at a CAGR of 10.2% till FY13f. Gas consumption by power and fertilizer
companiesandcitygasdistributionnetworksarelikelytodrivedemand.Thegrowthindomesticgassupplyislikelyto
outpacedemandgrowthtillFY13f.However,domesticsupplyisunlikelytosatiatetheentiredemandandLNGislikely
tofillthegap.WealsoestimatehigherdemandforspotLNGasdomesticdemandislikelytobefarhigherthansupply.
SpotLNGislikelytofindmoretakersastheaveragegascosthasincreasedaftertheincreaseinAPMgaspricesfrom
USD1.8/mmbtutoUSD4.2/mmbtu,effective1Jun10.

CAGRof10.2%indomesticgasdemandfromFY10toFY13
Presently,gasaccountsforc10%oftotalenergyconsumptioninIndia,whiletheworldaverageisc24%.
Historically, there has always been a huge gas deficit in the country. However, with the estimated
increase in gas supply from new domestic discoveries and new LNG capacities, we estimate gas
demand to increase substantially. Gas demand is likely to grow from c226mmscmd in FY10 to
301mmscmdinFY13f,ataCAGRof10.2%.
Exhibit3: Naturalgasdemand(mmscmd)
Demandforgasislikelyto
growfromc226mmscmd
inFY10toc301mmscmdin
FY13f.

315

Power

Fertilizer

CGD

Industrials

Petrochemicals/Refineries

Spongeiron

210

105

0
FY08

FY09

FY10e

FY11f

FY12f

FY13f

Source:WorkingGroupXIplan,AvendusResearch

Faster growth is estimated from CGD and from refineries and petrochemicals, which are trying to
reducetheirfuelcostsandlosses.WeestimateaCAGRof7%to8%ingasrequirementduringFY13f
FY17f,takinggasdemandtoc400mmscmd.

GrowthindomesticsupplytooutpacedemandtillFY13f
Exhibit4: Domesticgassupply
Domesticsupplyislikely
torisefromc115mmscmd
inFY10toc189mmscmdin
FY13f.

(mmscmd)

FY09

FY10e

FY11f

FY12f

FY13f
59.3

ONGC+OINL(A)

53.3

54.7

56.2

57.2

Privatecompanies/JVs+CBM(B)

20.9

59.9

57.4

62.6

63.8

Projecteddomesticsupply(A+B)
Additionalgasanticipated(C)
Totalprojectedsupplyscenario(A+B)
Totalprojectedsupplyscenario2(A+B+C)

74.2
0.0
74.2
74.2

114.7
0.0
114.7
114.7

113.7
40.0
113.7
153.7

119.8
57.0
119.8
176.8

123.0
66.0
123.0
189.0

Source:WorkingGroupreport,AvendusResearch

InFY10,overallgassupplywasc147mmscmd,ofwhichc33mmscmdwasLNG.Gasdemandfortheyear
wasc226mmscmd,whiledomesticsupplywasc115mmscmd.Thoughthesupplydeficitcontinues,the
demandsupply gap has reduced as gas from Reliance Industries (RIL IN, NR) KrishnaGodavari (KG)
basinD6blockstartedflowingfromApr09.SupplyfromthenominatedblocksofOilandNaturalGas
Corporation(ONGCIN,NR)andOilIndia(OINLIN,NR)islikelytofallasthesearematureanddeclining

Oil&Gas

India Equity Research

GAIL(India)

fields.However,onaccountoftheestimatedincreaseinproductionfromRILsKGD6basin,theoverall
supply from private players/JVs is likely to increase in FY11f. Gujarat State Petroleum Corporations
(GSPC) discovery in the KG basin is likely to start producing from FY13f. Supply of coal bed methane
(CBM)isalsolikelytoincreasefrom0.05mmscmdinFY10to3.00mmscmdbyFY13f.

LNGlikelytoaddressthesupplydeficit
Developmentoffieldson
theEasterncoastlikelyto
beslow.

Considering overall demand projections and the optimistic scenario of estimated domestic supplies,
thesupplydeficitislikelytocontinue.DevelopmentoffieldsontheEasterncoastislikelytobeslow;
hence,supplygrowthislikelytoslowdownafterFY13f.Thisislikelytoresultinhigherconsumptionof
spot LNG from FY13f. Transnational pipelines are unlikely to be completed in the next three to four
years;hence,LNGwouldbetheonlysourceofimportedgas.
The country currently imports 24mmscmd of LNG at Dahej. With supply of another 2.5mtpa
(9.5mmscmd)ofLNGbeginningfromJan10,thetotalLNGatDahejislikelytocross28mmscmd.Thus,
total firm gas supply (realistic gas supply scenario + firm LNG contracts) is likely to increase to
c146mmscmdbyFY13f.
Exhibit5: Demandsupplybalance
(mmscmd)

FY09

FY10e

FY11f

FY12f

FY13f

197

226

262

279

301

Domesticgas(assuredsupply)

74

115

114

120

123

Domesticgas(optimisticscenario)

74

115

154

177

189

LNG(firm)

23

23

23

23

23

Demand

LNG(spot)

10

17

30

40

97

137

136

142

146

Totalsupplyoptimistic(totalLNGplusoptimisticdomesticsupply)

104

147

193

229

251

Supplygapinassuredsupply

100

88

126

137

156

92

79

69

50

50

Totalsupply(firmLNG+assureddomestic)

Supplygapinoptimisticscenario
Source:AvendusResearch

LNGsupplycanaddupto
95mmscmdatfull
capacity.

Petronet LNGs (PLNG IN, Hold) Dahej terminal has firm contracts for 7.5mtpa of LNG, while the
terminal can supply over 11.5mtpa. Shells Hazira terminal, with capacity of 2.5mtpa, is also
operational. PLNGs planned terminal at Kochi, with capacity of 2.5mtpa (expandable to 5.0mtpa), is
estimated to be operational by Feb12f. Ratnagiri Gas and Power Projects (RGPPL) 5.0mtpa LNG
terminalisalsolikelytobeoperationalinFY11.Thisterminalislikelytoenablemerchantsalevolumes
ofc3mtpainFY12f.A2.5mtpaLNGterminalisbeingplannedatMangalore,whilea1.25mtpaterminal
is likely to be set up at Ennore. Thus, LNG supply is estimated at 25mtpa by FY13f. At full capacity,
supply can potentially add up to 95mmscmd. However, even in the optimistic scenario, we have
assumedoverallcapacityutilizationattheLNGterminalsatc65%inFY13f.
SpotLNGislikelytofindmoreusersastheaveragegascosthasincreasedaftertheincreaseinAPM
gas prices from USD1.8/mmbtu to USD4.2/mmbtu from 1 Jun10. As the average gas price has
increased, the acceptability of higherpriced spot LNG is also likely to increase. Thus, the total gas
transportedislikelytoincrease.
Exhibit6: PotentialLNGsupply
(mtpa)

FY08

FY09

FY10e

FY11f

FY12f

FY13f

Dahej
Hazira

5.0

5.0

10.0

11.5

11.5

11.5

2.5

2.5

2.5

2.5

2.5

2.5

Dabhol

5.0

5.0

5.0

Kochi

2.5

2.5

Mangalore

1.3

2.5

Ennore

1.3

7.5

7.5

12.5

19.0

22.8

25.3

28.3

28.3

47.1

71.6

85.8

95.2

TotalLNGsupply
TotalLNGsupply(mmscmd)
Source:AvendusResearch

Oil&Gas

India Equity Research

GAIL(India)

Pipelineinfrastructureexpansiontohelpmeetdemand
Oftheover15,000kmofpipelineproposedbyvariousplayers,GAILislikelytocommissionover7,500kmbyendFY13f.
Currently, the total trunk pipeline network in the country extends for c11,070km. The pipelines are owned and
operated by central and state public sector undertakings, and also by private companies. GAIL owns c70% of the
pipeline, while GUJS owns c12%. A number of gas discoveries have been made in the eastern region, while historic
industrialdevelopmenthasbeeninwestIndia;thus,thereisaneedforanallIndiagastransmissionnetwork.

Over11,000kmofdomestictrunkpipelinenetworkexists
GAILsnetworkextends
forc7,000km.

Presently, the total trunk pipeline network extends for c11,070km. The pipelines are owned and
operatedbycentralandstatepublicsectorundertaking,andbyalsoprivatecompanies.Ofthecurrent
network,GAILsnetworkextendsforc7,000km,RGTIL(asubsidiaryofRIL)hasatrunkpipelinenetwork
ofc1,385kmandGUJShasatrunkpipelinenetworkofc1,550km.Thepipelinenetworkisspreadacross
Gujarat, Maharashtra, Rajasthan, Madhya Pradesh, Uttar Pradesh, Delhi, Haryana, Andhra Pradesh,
TamilNadu,TripuraandAssam.
Exhibit7: Existingtransmissiongaspipelinenetwork
PipelineNetwork
ExistingPipelineNetworkofGAIL
DahejVijaipur(DVPL)
HaziraVijaiputJagdishpur(HVJ)

UpdatedLengths(km)
6,778
770
3,397

Assamregion

Tripuraregion

61

Gujaratregion

742

Maharashtraregion

125

AndhraPradeshregion

834

TamilNaduregion

260

DahejUran(DUPL)/DabholPanvel(DPPL)

581

ExistingPipelineNetworkRGTIL

1,385

KakinadaHyderabadUranAhmedabad

1,385

ExistingPipelineNetworkGUJS

1,280

Gujaratregion

1,550

Otherregionalcompanies
Total

1,357
11,070

Source:Company,Infraline,AvendusResearch

Amongotherregionalpipelines,AssamGasCompanyhasaprominentpipelinenetworkinnortheast
India.Inadditiontoits250kmpipelinelinkingSibsagarwithMargherita,ithasover350kmofbranch
pipelinesintheregion.

Over15,000kmofpipelinenetworkbeingplanned
Pipelinenetworkneeded
tobridgethedistance
betweendemandand
supplycenters.

GAILhasproposeda
7,890kmnationalgasgrid.

Gastransmissionhastodevelopfasterthanearlier.Anumberofgasdiscoverieshavebeenmadeinthe
eastern region, while historic industrial development has been in west India. The distance between
demandandsupplycentersisboundtobeahindrance,ifthegasnetworkisnotdevelopedproperly.
With LNG terminals existent at Dahej and Hazira and the upcoming ones at Dabhol, Mangalore and
Ennore, there is an urgent need to develop transmission lines connecting different states. While the
localdistributionsystemmaybedevelopedovertime,inlinewithdemandgrowth;thetransmission
system needs to be taken up on top priority to enable various gas producers and LNG importers to
reachthemarket.
Accordingly, GAIL has proposed a 7,890km national gas grid, connecting various demand and supply
centers,toboostgastradeinthecountry,apartfromimprovingsecurityofsupply.RILisalsoreviewing
itsproposedpipelinenetworkafterthediscoveryofgasreservesintheKGBasininOct02.Itplansto

Oil&Gas

India Equity Research

GAIL(India)

acquiretherightofusagetolaytwoseparategaspipelinesfortransportingKGgastoGoainthewest
andfromJamnagartoCuttackintheeast.BesidesGAIL'sNationalGasGrid,GUJSisalsoexpandingits
networkinGujarattoc2,500kmandhasexpressedinterestforfourpipelinesoutsideGujarat.Thetotal
lengthofthesepipelinesisinexcessof6,400km.

GAILlikelytocommissionover7,500kmofpipelinebyendFY13f
GAILspipelinelengthis
likelytodouble.

GAIL is setting up 6,663km of transmission pipelines and c900km of spur pipelines. Most of these
pipelines are likely to be commissioned by end FY13f. With these pipelines in place, GAILs pipeline
lengthislikelytodouble.Transmissioncapacityisalsolikelytomorethandouble.
Exhibit8: Newpipelinecapacity(builtup)
Pipelineproject

Capacity(mmscmd)

Length(km)

DahejVijaipurpipelinephaseII

24to78

610

VijaipurDadripipeline

20to80

505

DadriBawanaNangalpipeline

31

646

ChainsaJhajjarHissarpipeline

35

349

JagdishpurHaldiapipeline

32

2,050

DhabolBangalorepipeline

16

1,389

KochiKoottanadMangalore/Bangalorepipeline

16

1,114

Source:Company

Exhibit9: Newspurpipelinecapacity(builtup)
Pipelineproject

Capacity(mmscmd)

Length(km)

KaranpurMoradabadKashipurRudrapurpipeline

2.5

185

PipelineforFocusenergyconsortiumtillRamgarhterminal

1.2

90

VijaipurKotapipelineupgradationandlayingspurlinestoBhilwaraandChittorgarh

290

BawanaNangalspurlines(UttaranchalandPunjab)

270

1.25to2.75

71

CapacityaugmentationofAgraandFerozabadregion
Source:Company

Oil&Gas

India Equity Research

GAIL(India)

ThreeyearCAGRof19.5%intransmissionvolumes
OptimisticdomesticgassupplyislikelytogrowatathreeyearCAGRofc18%.Anumberofpowerandfertilizerplants
requiregas.Moreover,citygasdistributionislikelytoflourishoncetheexcessgasfromtheKGbasinandtheexpanded
LNGterminalisavailable.Tobridgethedistancebetweenthesupplyanddemandcenters,expansionofthepipeline
networkislikelytobecritical.Transmissionvolumesarelikelytoincreasefrom106.5mmscmdinFY10toc182mmscmd
inFY13f,ataCAGRof19.5%.Accordingtothenewtariffregulations,pipelinetariffwouldbebasedonthe12%posttax
RoCEmethod.TariffcalculationforthenewpipelineisbasedontheminimumutilizationratesetbythePetroleumand
NaturalGasRegulatoryBoard.Asactualcapacityutilizationislikelytobehigherthanthestipulatedutilization,overall
RoCEandIRRfortheprojectislikelytobeinexcessof12%posttax.AsharpincreaseinvolumesinFY11fandFY12fis
likelytoresultinmarginalimprovementinthesegmentsEBITmargins.

Demandgrowthtoremainhighatc301mmscmd
Powerandfertilizerplants
willcontinuetodrivethe
gasdemandgrowth.

Alargenumberoffertilizerplantsstilloperateonfueloilandnaphtha,whilepowerplantslieidlefor
wantofgas.Powerplantsarelikelytorequirec139mmscmdofgasbyFY13f,whilefertilizerplantsare
likelytoneedc82mmscmd.Thecurrentconsumptionofbothsectorsisfarlower.
Exhibit10: Sectoraldemandforgas
(mmscmd)

FY08

FY09

FY10e

FY11f

FY12f

FY13f
139.2

Power

79.7

91.2

102.7

114.2

126.6

Fertilizer

41.0

42.9

55.9

76.3

76.3

81.6

CityGasdistribution

12.1

12.9

13.8

14.8

15.8

16.9

Industrial

15.0

15.1

17.2

18.4

19.7

20.6

Petrochemical/Refineries/InternalConsumption

25.4

27.2

29.1

31.1

33.3

34.9

6.0

6.4

6.9

7.4

7.9

8.2

179.2

196.6

225.5

262.1

279.4

301.4

SpongeIron/Steel
Total
Source:WorkingGroup,AvendusResearch

Of the total gas demand from power and fertilizer plants, Gujarat is likely to contribute a significant
amount. Power projects such as Torrent Powers (TPW IN, NR) plant at Sugen and National Thermal
Power Corporations (NATP IN, NR) plants at Kawas and Gandhar are examples of gasbased power
plantslikelytobecommissionedinGujarat.FertilizerplantssuchasGujaratNarmadaValleyFertilizers
(GNFCIN,NR)inBharucharelikelytoconverttheirfeedstockfromfueloiltogas.Thegasreceivedat
theIndianFarmersFertiliserCooperatives(IFFCO)plantatKalol,Gujarat,andGujaratStateFertilisers
andChemicals(GSFCIN,NR)plantatBarodaislowerthantheactualrequirements.Thus,gasdemand
inthefertilizersectorislikelytobedrivenbyhigherdemandfromgasbasedplantsandplantslooking
toconverttheirfeedstock.

Expandedpipelinenetworktoopennewavenues
Most gas players have planned pipeline expansions. Gas is a sector where supply will help increase
consumption.Thereishugerequirementfornaturalgasinthecountry.Withsupplylikelytoincrease
onaccountoftheKGbasin gasandhigherLNGsupplies,demandislikelytoincreasefurther.Thisis
likelytoleadtoademandsupplymismatch.Tomeetthehigherdemand,pipelineconnectivityislikely
to be needed. The expanded pipeline is likely to open new avenues for demand; thus, increasing
transmissionvolumes.

Transmissionvolumestofollowthecapacityincrease
GAILstransmission
capacityislikelytodouble
byFY14f.

GAILs transmission capacity is estimated to increase from c150mmscmd in FY10 to c300mscmd in

FY14f.Thecapacityincreaseislikelytoleadtoanincreaseintransmissionvolumes.TheDahejVijaipur
(DVPL) expansion is likely to be completed in 1QFY12f, increasing transmission volumes further.
TransmissionvolumeshaveseenasurgeinFY10onaccountoftheincreasegassupplyfromRILsKG
basingasblock.TheKGbasingasisestimatedtoincreasefrom60mmscmdto80mmscmdby1QFY12.

Oil&Gas

India Equity Research

GAIL(India)

Transmissionvolumestoincreasetoc182mmscmdbyFY13f
OnaccountoftheexpandednetworkandhighergassupplyfromtheKGbasin,transmissionvolumes
arelikelytoincreasefrom106.5mmscmdinFY10toc182mmscmdinFY13f,ataCAGRof19.5%.
Exhibit11: Gasvolumetransmitted(mmscmd)
210

140

70

0
FY09

FY10

FY11f

FY12f

FY13f

Source:Company,AvendusResearch

Marginstoremainrobust,despiteregulatorychangesfortariffs
Exhibit12: EBITandEBITmargintrendfornaturalgastransmission
Asharpincreasein
volumesinFY11fand
FY12fislikelytoresultin
marginalimprovementin
EBITmarginsforthe
segment.

45

72
EBIT(INRbn)

EBITmargin(%,RHS)

30

69

15

66

63
FY09

FY10

FY11f

FY12f

FY13f

Source:Company,AvendusResearch

Accordingtothenewtariffregulations,pipelinetariffsarelikelytobebasedonthe12%posttaxRoCE
method, reducing overall tariffs. Tariff calculation for the new pipeline is based on the minimum
utilizationratesetbythePNGRB.GAILhascommittedgasinexcessoftheminimumstipulatedcapacity
utilization;hence,itislikelytohavehigherprofitsfromgastransmission.Asactualcapacityutilization
islikelytobehigherthanthestipulatedutilization,overallRoCEandIRRfortheprojectislikelytobein
excessof12% posttax.Asharpincreasein volumes inFY11fandFY12f islikelytoresult inmarginal
improvementinEBITmarginsforthesegment.

Oil&Gas

10

India Equity Research

GAIL(India)

Highergaspricelikelytoresultinlowermarginsinpetrochemicals
Despitecapacityadditionsacrosstheglobe,petrochemicalpricesarelikelytoremainfirmforthenexttwoyearsonthe
back of higher crude prices and lower utilization at the new petrochemical plants. Domestic players are likely to be
protected by the freightcost advantage and the dutystructure. Gasbased petrochemical crackers will have a higher
advantageasgaspricesdonotchangeinlinewithcrudeprices,andhencehighercrackspreadscanbeachieved.GAILis
alsoexpandingitscapacityfromc0.4mtpatoc0.8mtpabyFY14f.TheproposedgaspricehikeforAPMgassuppliedto
petrochemicalconsumersislikelytoimpactmarginsinFY12fandFY13f.However,higherpolymerproductionislikelyto
increasetheEBITfromthesegment.

Petrochemicalpriceslikelytoremainfirminthemediumterm
Marginsfordomestic
playersarelikelytobe
protectedbythefreight
costadvantageandthe
dutystructure.

Though a number of petrochemical projects are likely to be commissioned in the Middle East and
China, prices are likely to remain firm. Crude prices are likely to remain above USD75/bbl. Beyond
FY13f, global petrochemical capacity additions are likely to lead to lower utilization rates; thus,
impactingproductprices.Marginsfordomesticplayersarelikelytobeprotectedtoacertainextentby
the freightcost advantage and the duty structure in India. To shield product prices from falling, the
government has introduced antidumping duties on vinyl chloride monomer (VCM), which is an
intermediate raw material for poly vinyl chloride (PVC). Also, the provisional (for six months)
antidumpingdutywasimposedonpolypropyleneoriginatingfromOman,SaudiArabiaandSingapore.

Higheraveragegascosttoimpactmargins
APMgaspricefor
petrochemicalshasbeen
proposedtobeincreased
fromUSD4.75/mmbtuto
USD5.25/mmbtu.

GAILhasagasbasedpetrochemicalcracker.Thebenefitsofagascrackerarehighwhencrudeprices
arehigh.Highercrackspreadsareavailableforgascrackersasdomesticgaspricesdonotmoveinline
withinternationalcrudeprices.However,thegovernmenthasrecentlybeenincreasinggaspricesina
movetowardsmarketdeterminedpricing.Thelatestproposal,ifaccepted,willincreasetheAPMgas
price for petrochemicals from USD4.75/mmbtu to USD5.25/mmbtu; thus, increasing the average gas
costforGAIL.Thehighergascostislikelytoreducemarginsinthepetrochemicalssegment.
The company intends to expand the petrochemicals capacity from 0.41mtpa to 0.5mtpa in 2HFY11f
andfurtherto0.8mtpabyFY14f.
Exhibit13: EBITandEBITmargintrendforpetrochemicals
18

50
EBIT(INRbn)

EBITmargin(%,RHS)

12

45

40

35
FY09

FY10

FY11f

FY12f

FY13f

Source:Company,AvendusResearch

Oil&Gas

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India Equity Research

GAIL(India)

OtherbusinessestoaddtotheEBIT;subsidysharingtocontinue
LPGtransmissionvolumesarelikelytogrowataCAGRofc8%,whilepipelinetransmissionchargesarelikelytoremain
flat. As GAIL has been allowed to charge marketing margins on APM gas, it is likely to marginally improve overall
marginsfromthegastradingbusiness.LPGandliquidhydrocarbonrevenuesarelikelytogrowataCAGRofc4%.EBIT
margins are likely to improve as we estimate GAILs share of the subsidy to decline in FY12f and FY13f. However,
continuedsubsidysharingbyGAILislikelytokeepthestockfromrerating.Thepresenceincitygasdistributionisa
potentialupsideforthecompanysrevenues.Inlinewiththegrowthintransmissionvolumes,EBITDAislikelytogrow
at a threeyear CAGR of 20.8%. PAT growth is unlikely to match EBITDA growth as newer assets would mean higher
depreciation. Also, the capex plan of over INR290bn is likely to require debtfunding, increasing interest costs. PAT
marginislikelytodeclinefrom12.0%inFY10to11.3%inFY13f.

LPGtransmissiontocontinuepostingrobustmargins
LPG transmission posted an EBIT of 62.2% in FY10. The company can further improve the volumes
transported. Improvement in LPG reach and more rural households switching from kerosene to LPG
wouldleadtohigherLPGtransportvolumes.WeforecastathreeyearCAGRof8%involumes.Pipeline
transmissionchargesarelikelytoremainflat.
Exhibit14: EBITandEBITmargintrendforLPGtransmission
Weforecastathreeyear
CAGRof8%involumes.
Pipelinetransmission
chargesarelikelyto
remainflat.

64
EBIT(INRbn)

EBITmargin(%,RHS)

62

60

58

56
FY09

FY10

FY11f

FY12f

FY13f

Source:Company,AvendusResearch

Marginalincreaseinnaturalgastradingmargins
The government increased the APM gas price for priority sector consumers from USD1.8/mmbtu to
USD4.2/mmbtu in Jun10. Along with the increase in gas price, the government has allowed GAIL to
chargemarketingmarginsonthisgas.Thus,weestimatethemarginsfromthegastradingbusinessto
improve.Thevolumeofgastradedislikelytoincreasefrom81.4mmscmdinFY10toc115mmscmdin
FY13f,ataCAGRof12.3%.

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12

India Equity Research

GAIL(India)

Exhibit15: EBITandEBITmargintrendforgastrading
6

2.3
EBIT(INRbn)

EBITmargin(%,RHS)

2.1

1.9

1.7
FY09

FY10

FY11f

FY12f

FY13f

Source:Company,AvendusResearch

Subsidyonpetroleumfuelstocontinueimpactingprofits
Upstreamcompaniesare
likelytobearonethird
thetotalunderrecoveries
inFY12fandFY13f.

GAILisoneoftheupstreamcompaniesthatsharessubsidyonretailpetroleumfuels.ThoughtheDr.
KiritParekhCommitteerecommendedexcusingGAILfromsubsidysharingasitisnotaproducer,the
governmenthasdirectedthecompanytoshareapartofthesubsidy.Thesubsidysharingmechanism
till date has been ad hoc and the government has changed the mechanism each year. In FY10,
upstream companies shared 100% of the auto fuel underrecovery; while in FY11f, they are likely to
shareonethirdthetotalunderrecoveries.Thegovernmentisyettocomeoutwithasubsidysharing
patternforthefuture.Hence,wehaveassumedthatupstreamcompaniesarelikelytobearonethird
thetotalunderrecoveriesinFY12fandFY13f.

GAILislikelytoshare7%
oftheunderrecovery
bornebyupstream
companies.

We estimate the total underrecovery for FY11f at INR520bn. We have assumed diesel deregulation
from 1QFY12f; hence, underrecoveries have been estimated at INR320bn in FY12f and INR350bn in
FY13f. GAIL is likely to share 7% of the underrecovery borne by upstream companies. We estimate
GAILtoprovidesubsidyofINR12bn,INR7.4bnandINR8.1bninFY11f,FY12fandFY13f,respectively.
Exhibit16: EstimatedunderrecoveryforGAIL(INRbn)
20

15

10

0
FY09

FY10

FY11f

FY12f

FY13f

Source:Company,AvendusResearch

Revenues from the LPG and liquid hydrocarbon segments is likely to grow at a CAGR of c4% during
FY10FY13f, while EBIT is likely to grow at a CAGR of c9% on account of the estimated reduction in
subsidysharinginFY12f.However,continuedsubsidysharingislikelytodampentheimprovementin
EBITandEBITmargins.

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13

India Equity Research

GAIL(India)

Potentialupsidefrompresenceincitygasdistribution
AccordingtothepetroleumministrysVision2015,c200citiesarelikelytobecoveredundertheCGD
network.GAILispresentin12cities,eitherdirectlyorthroughjointventures,andisplanningtoramp
upitspresencetoc50citiesinthenextfourtofiveyears.However,theapprovalsforsettingupCGD
networksneedtocomefromthePNGRB.Hence,wehavenotforecastthenumberofcitiesinwhich
GAILislikelytosetupCGDnetworksinthenextfiveyears.Currently,IndraprasthaGas(IGLIN,NR),
one of GAILs joint ventures, distributes 2.2mmscmd of gas in the National Capital Region, while
Mahanagar Gas, another joint venture, distributes 1.6mmscmd in Mumbai. GAILs gas distribution
businesshasthepotentialtoreachc20mmscmdby2015.
GAILGashaswonthebid
tosetupCGDnetworkin
fourcities.

GAIL has set up GAIL Gas, a 100% subsidiary, to develop CGD networksin line with the PNGRB
proposal,whichstatesthattheCGDbusinessneedstobeseparatefromthegasmarketingbusiness.
Sinceitsincorporation,GAILGashasbidtosetupCGDnetworksinninecitiesandhaswontherights
forfour(Dewas,Meerut,SonepatandKota).
The CGD business is likely to help improve EBITDA margins as the target consumers are likely to be
small industries for piped natural gas (PNG). Compressed natural gas (CNG) also is likely to take
precedence in the CGD network as the government is keen to move towards greener fuel for
transportation.ThelowmargindomesticPNGconsumersarelikelytobethelasttoavailconnections
totheCGDnetwork.

CAGRof21%inEBITDAduringFY10FY13f
In line with the growth in transmission volumes, EBITDA is likely to grow at a CAGR of 20.8% during
FY10FY13f.EBITDAmarginsarelikelytoimproveastheamountofsubsidysharedislikelytodecline.
Marketing margins on APM gas are also likely to add to EBITDA margins. Transmission charges for
natural gas and LPG are likely to remain flat. Thus, EBITDA margins are likely to improve by c226bp
duringFY10FY13f.
Exhibit17: GAILsoverallEBITDAandEBITDAmargintrend
EBITDAmarginsarelikely
toimprovebyc226bp
duringFY10FY13f.

90

22
EBITDA(INRbn)

EBITDAmargin(%,RHS)

60

20

30

18

16
FY08

FY09

FY10

FY11f

FY12f

FY13f

Source:Company,AvendusResearch

PATmarginstodecline
PATgrowthisunlikelytomatchEBITDAgrowthasnewerassetswouldmeanhigherdepreciation.Also,
thecapexplanofoverINR290bnislikelytorequiredebtfunding,increasinginterestcosts.PATmargins
arelikelytodeclinefrom12.0%inFY10to11.3%inFY13f.

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India Equity Research

GAIL(India)

Exhibit18: PATandPATmargintrend
48

15
Netprofit(INRbn)

Netmargin(%,RHS)

32

13

16

11

9
FY08

FY09

FY10

FY11f

FY12f

FY13f

Source:Company,AvendusResearch

E&Pbusinesstoimprovevaluations
DuringFY10FY13f,capex
ofoverINR35bnhasbeen
plannedforE&Pbusiness.

GAIL has interest in 27 exploration and production (E&P) blocks and three CBM blocks. The
participatinginterestvariesfrom10%to30%.Ofthe30blocks,GAILisanoperatorin2,whileithas
participatinginterestintheothers.Tilldate,hydrocarbondiscoverieshavebeenmadeinsixofthese
blocksandGAILhasinvested INR21bnforE&P.DuringFY10FY13f,additionalcapexofoverINR35bn
hasbeenplanned.
TwooftheblocksinwhichGAILhasparticipatinginterestareinMyanmarandarelikelytocommence
production in FY14f. The current estimate of the inplace reserves for five of GAILs blocks is c1,815
millionbarrelsofoilequivalent(mboe).

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India Equity Research

GAIL(India)

InitiatewithanAddratingandSep11targetpriceofINR562
WeuseathreestageDCFtoevaluatethecurrentvalueofthecorebusiness,whiletheE&Pbusinessisvaluedonthein
place resources. Based on a fair value of INR471/share for the core business, INR20/share for the E&P business and
INR71/shareforinvestmentsinlistedentitiesatthecurrentmarketprice,wearriveataSOTPpriceofINR562.Thestock
hastradedinvariousP/Ebandsoverthepastthreeyears.Presently,ittradesatlessthan15xtheoneyearforwardP/E.
Atourtarget,itislikelytotradeat15.7xtheoneyearforwardP/EinSep11.WeinitiatecoveragewithanAddrating.

DCFbasedtargetpriceofINR471/shareforthecorebusiness
WeuseathreestageDCFtoevaluatethecurrentvalueofthestock.Thefirststagehasathreeyear
explicitforecast,thesecondstagehasforecastsfor10yearswithhighgrowthandthelaststagehas
forecastsfor10yearswithlowergrowthandterminalgrowthof2.5%.

Terminalgrowthrate
assumedtobe2.5%.

Exhibit19: FCF,ROIC,WACC
FreeCashFlow(INRmn)

ROIC(%,RHS)

WACC(%,RHS)

81,500

38

47,500

29

13,500

20

20,500

11

54,500

2
2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

Source:AvendusResearch

Exhibit20: KeyassumptionsforFCFcalculation
KeyParameters

FY11f

SalesGrowth(%)
EBITmargins(%)
TaxRate(%)
GrossTurnover(x)
WCAP(dayssales)
ROIC(%)

DCFValueasonMar10

24.0
16.5
33.4
1.1
22
15.6

StageI:3yearsexplicit
FY12f FY13f
OverstageI
13.0
16.7
33.4
1.0
18
13.9

(INRmn) %ofEV

12.0
17.2
33.3
0.8
15
12.1

16.2
16.8
33.4
1.0
19
13.9

StageII:10years
FY23f
OverstageII

FY14f

CAGR
Average
Average
Average
Average
Average

9.4
17.2
33.3
0.8
15
10.5

4.2
11.3
32.5
2.0
9
11.8

WACCAssumption(%)

3.8
14.2
32.9
1.4
12
10.1

CAGR
Average
Average
Average
Average
Average

75,839

15

Riskfreerate

8.00

StageIIcashflows

265,616

53

Mkt.RiskPremium

6.00

StageIIIcashflows

150,913

30

Beta(x)

0.74

TerminalValue

157,837

32

CostofEquity

12.4

TotalEV
Less:GrossDebt
Add:Investments&Cash
EquityValue

498,528
60,259
29,675
500,653

100

CostofDebt
Debt/TotalCapital
WACC
TerminalGrowth

8.0
40.0
9.6
2.5

1,268
395
471

4.1
11.0
32.5
2.0
9
12.8

StageIII:10years
FY33f OverstageIII
2.8
9.0
32.5
2.0
8
35.3

3.4
10.0
32.5
2.0
8
21.2

SensitivityAnalysis

CAGR
Average
Average
Average
Average
Average

WACC(%)

Terminal
Growth(%)

Explicitperiodcashflows

Noofshares(mn)
Value/share(INR)(Mar10)
Value/share(INR)(Sep11)

FY24f

8.6

9.6

10.6

2.0

556

460

386

2.5

573

471

393

593

483

3.0

401

Source:AvendusResearch

Oil&Gas

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India Equity Research

GAIL(India)

Thefirsttwoyearsofthesecondstagearelikelytowitnesshighergrowthasnaturalgassupplyislikely
to increase in this period. Based on this, we arrive at a DCF value of INR471/share for the core
business, which comprises transmission, natural gas trading, petrochemicals, LPG and liquid
hydrocarbonsandGAILTel.

Presentlytradingc15xforwardP/Eneedtoupdate
The stock has traded in various bands over the past three years. Over the past three months it has
tradedatanaverageof14.4x.Presentlyitistradingat14.8xtheoneyearforwardP/E.
Exhibit21: GAIL'soneyearforwardrollingP/Eband
Overthepastthree
monthsithastradedatan
averageof14.4x.

600
GAIL

5x

8x

11x

14x

450

300

150

0
Apr07

Oct07

Apr08

Sep08

Mar09

Sep09

Mar10

Sep10

Source:AvendusResearch

AssumingtheSOTPtargetpriceofINR562/share,thestockislikelytotradeataoneyearforwardP/E
of15.7x.PastthreeyearaverageP/Eis11.3x.
Exhibit22: ProjectedoneyearforwardP/E
20

15

10

0
Oct06

Mar07

Sep07

Feb08

Jul08

Jan09

Jun09

Nov09

May10

Oct10

Mar11

Sep11

Source:Bloomberg,AvendusResearch

E&PbusinessvaluedatINR20/share
The E&P business is valued on the basis of inplace resources. We value the E&P business at
INR20/share.

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India Equity Research

GAIL(India)

Exhibit23: E&Pbusiness
Block

Inplaceresources Recoverables
(mboe)
(%)

Value
(USD/boe)

Stake
(%)

Value
(INRmn)

Value
(INR/share)

A1,Myanmar

1,008

60

4.2

10

11,812

9.3

A3,Myanmar

396

60

4.2

10

4,640

3.7

Block56,Oman

250

45

4.2

25

5,493

4.3

CBONN2000/1

50

30

5.0

50

1,744

1.4

114

25

5.0

25

1,657

1.3

25,345

20.0

CYOS/2

Source:Company,AvendusResearch

InvestmentsvaluedatINR71/share
GAILhasinvestmentsinanumberoflistedentities.Wehaveconsideredtheunrealizedgainsinthese
investmentsbasedontheircurrentmarketprices.
Exhibit24: Valueofinvestments

Noofshares

CMP(INR) Unrealizedgains(INRmn)

Value/share(INR)

IndraprasthaGas

31,500,000

325

9,910

PetronetLNG

93,750,000

107

9,053

51,400,267

1411

66,963

53

210,000,000

25

3,812

OilandNaturalGasCorporation
ChinaGasHolding
TotalvalueofinvestmentsatCMP

3
71

Source:Company,AvendusResearch

Sep11SOTPtargetpriceofINR562
Exhibit25: Valuationsummary

DCFvalueforcorebusiness
ValueforE&Pbusiness
Valueofinvestments
SOTPtargetprice

(INR/share)
471
20
71
562

Source:AvendusResearch

Basedonthesumofpartsmethod,wearriveataSep11targetpriceofINR562forGAIL.Weinitiate
coverageonthestockwithanAddrating.

Keyriskstoourestimates
f Changeingassupply.
f Changesinthetariffpolicy,andhencethetariffstobecharged.
f LowerinternationalLNGprices.
f Lowercrudeprices,whicharelikelytoimpactpetrochemicalprices.

Oil&Gas

18

India Equity Research

GAIL(India)

Annexure:Pipelineprojects
Exhibit26: Pipelineprojects

Source:Company

Oil&Gas

19

India Equity Research

GAIL(India)

FinancialsandValuations
Incomestatement(INRmn)
Fiscalyearending
Grosssales
Less:Exciseduty
Netsales
Otheroperatingincome
Totaloperatingincome
Totaloperatingexpenses
Netmaterials
Otherdirectcosts
Personnel
SG&A
R&D
EBITDA
Otherincome
Depreciation
EBIT
Interest
RecurringPBT
Netextraordinaryitems
PBT(reported)
Totaltaxes
PAT(reported)
Add:Shareofearningsofassociate
Less:Minorityinterest
Priorperioditems
Netincome(reported)
Avendusnetincome

03/09
237,760

237,760

237,760
197,113
21,233
8,695
5,767
161,418

40,647
7,966
5,599
43,014
1,083
41,931

41,931
14,003
27,928

27,928
27,928

03/10f
261,535

261,535

261,535
213,774
21,913
9,491
6,170
176,199

47,762
8,109
7,045
48,826
1,606
47,219

47,219
15,799
31,420

31,420
31,420

03/11f
324,304

324,304

324,304
263,028
22,927
11,935
6,602
221,564

61,276
8,605
9,143
60,738
3,135
57,603

57,603
19,258
38,345

38,345
38,345

03/12f
366,463

366,463

366,463
294,948
24,030
13,487
7,064
250,367

71,516
8,961
11,671
68,805
5,204
63,600

63,600
21,256
42,345

42,345
42,345

03/13f
410,439

410,439

410,439
326,212
25,189
15,000
7,559
278,464

84,227
9,334
14,984
78,577
8,871
69,706

69,706
23,218
46,487

46,487
46,487

Dividend+Distributiontax

10,388

9,201

11,279

12,466

13,653

Sharesoutstanding(mn)
Avendusdilutedshares(mn)
AvendusEPS(INR)

1,268.5
1,268.5
22.0

1,268.5
1,268.5
24.8

1,268.5
1,268.5
30.2

1,268.5
1,268.5
33.4

1,268.5
1,268.5
36.6

32.0
3.5
9.9
10.0
9.2
27.2

10.0
17.5
13.5
12.6
12.5
12.5

24.0
28.3
24.4
22.0
22.0
22.0

13.0
16.7
13.3
10.4
10.4
10.4

12.0
17.8
14.2
9.6
9.8
9.8

17.1
18.1
11.4
19.0
33.4

18.3
18.7
11.7
17.2
33.5

18.9
18.7
11.5
14.9
33.4

19.5
18.8
11.3
14.1
33.4

20.5
19.1
11.1
13.4
33.3

Growthratios(%)
Totaloperatingincome
EBITDA
EBIT
RecurringPBT
Avendusnetincome
AvendusEPS

Operatingratios(%)
EBITDAmargin
EBITmargin
Netprofitmargin
Otherincome/PBT
EffectiveTaxrate

Oil&Gas

20

India Equity Research

GAIL(India)

Balancesheet(INRmn)
Fiscalyearending
Equitycapital
Preferencecapital
Reservesandsurplus
Networth
Minorityinterest
Totaldebt
Deferredtaxliability
Totalliabilities
Grossblock
less:Accumulateddepreciation
Netblock
CWIP
Goodwill
Investments
Cash
Inventories
Debtors
Loansandadvances
less:Currentliabilities
less:Provisions
Networkingcapital
Totalassets

03/09
12,685

135,012
147,696

12,001
13,259
172,957
176,040
85,537
90,503
24,263

17,373
34,561
6,014
15,034
66,756
41,779
39,769
40,818
172,957

03/10f
12,685

157,444
170,128

47,000
13,259
230,388
226,540
92,582
133,958
44,263

15,042
14,633
6,448
17,913
70,174
47,043
25,000
37,125
230,388

03/11f
12,685

184,723
197,408

80,480
13,259
291,147
295,930
101,725
194,205
42,333

15,875
18,853
6,986
22,213
79,489
58,270
30,537
38,734
291,147

03/12f
12,685

214,815
227,500

131,870
13,259
372,629
371,005
113,396
257,609
53,408

16,916
26,274
7,594
25,100
85,259
65,810
33,722
44,696
372,629

03/13f
12,685

247,649
260,334

214,460
13,259
488,053
485,227
128,380
356,846
76,836

18,218
19,418
8,275
28,112
90,893
73,675
36,872
36,153
488,053

Cashflowstatement(INRmn)
Fiscalyearending
Netprofit
Depreciation
Deferredtax
Workingcapitalchanges
Less:Otherincome
Cashflowfromoperations
Capitalexpenditure
Strategicinvestmentspurchased
Marketableinvestmentspurchased
Changeinotherloansandadvances
Goodwillpaid
Otherincome
Cashflowfrominvesting
Equityraised
Changeinborrowings
Dividendspaid(incl.tax)
Others
Cashflowfromfinancing
Netchangeincash

03/09
03/10f
03/11f
03/12f
03/13f
27,928
31,420
38,345
42,345
46,487
5,599
7,045
9,143
11,671
14,984
62
0
0
0
0
16,346
13,022
11,771
7,126
7,213
7,966
8,109
8,605
8,961
9,334
41,969
17,334
50,653
52,181
59,351
22,558
70,500
67,460
86,150
137,650
2,500
2,998
0
0
0
36
666
833
1,041
1,302
23,836
3,213
9,160
5,666
5,526

7,966
8,109
8,605
8,961
9,334
40,892
63,273
68,848
83,897
135,144

657
34,999
33,480
51,390
82,590
10,388
9,201
11,279
12,466
13,653
200
213
213
213
0
11,246
26,011
22,414
39,137
68,937
10,168
19,929
4,220
7,421
6,856

Oil&Gas

21

India Equity Research

GAIL(India)

KeyRatios
Fiscalyearending
Valuationratios(x)
P/E(onAvendusEPS)
P/E(onbasic,reportedEPS)
P/CEPS
P/BV
Dividendyield(%)
Marketcap./FCF
Marketcap./Sales
EV/Sales
EV/EBITDA
EV/FCF
EV/TotalAssets
NetCash/Marketcap.
Pershareratios(INR)
AvendusEPS
EPS(Basic,reported)
CashEPS
BookValue
Dividendpershare
ROEDecomposition(%)
EBITmargin
Assetturnover(x)
Interestexpenseratio
Taxretentionratio
ROA
Totalassets/equity(x)
ROE
Returnratios(%)
EBIT/CapitalEmployed
ROCE
ROIC
FCF/IC
OCF/Sales
FCF/Sales
Turnoverratios(x)
Grossturnover
Netturnover
Revenue/IC
Inventory/Sales(days)
Receivables(days)
Payables(days)
Workingcapitalcycle(excash)(days)
Solvencyratios(x)
Grossdebttoequity
Netdebttoequity
NetdebttoEBITDA
InterestCoverage(EBIT/Interest)

03/09

03/10f

03/11f

03/12f

03/13f

22.0
18.3
18.3
4.2
1.4
14.6
2.6
2.2
12.9
27.0
3.0
18.7

19.5
19.5
15.9
3.6
1.3
35.4
2.3
2.2
12.0
10.8
2.5
16.1

16.0
16.0
12.9
3.1
1.6
12.1
1.9
1.8
9.7
35.3
2.0
18.4

14.5
14.5
11.3
2.7
1.7
11.7
1.7
1.7
8.8
18.6
1.7
20.7

13.2
13.2
10.0
2.4
1.9
10.3
1.5
1.7
8.5
9.1
1.5
20.7

22.0
26.4
26.4
116.4
7.0

24.8
24.8
30.3
134.1
6.2

30.2
30.2
37.4
155.6
7.6

33.4
33.4
42.6
179.3
8.4

36.6
36.6
48.5
205.2
9.2

18.1
1.4
0.7
66.6
17.0
1.2
20.1

18.7
1.3
0.8
66.5
15.6
1.3
19.8

18.7
1.2
1.2
66.6
14.7
1.4
20.9

18.8
1.1
1.6
66.6
12.8
1.6
19.9

19.1
1.0
2.1
66.7
10.8
1.8
19.1

26.2
17.4
30.4
20.6
17.7
8.2

24.2
16.1
25.4
41.5
6.6
20.3

23.3
15.5
21.8
9.1
15.6
5.2

20.7
13.8
18.7
13.9
14.2
9.3

18.3
12.2
16.1
24.1
14.5
19.1

1.4
2.6
2.5
9.0
19.8
459.7
78.8

1.2
2.0
2.0
8.7
23.0
516.2
74.0

1.1
1.7
1.8
7.6
22.6
551.3
58.9

1.0
1.4
1.5
7.3
23.6
603.6
61.6

0.8
1.2
1.3
7.1
23.7
633.4
61.4

0.2
0.6
0.3
39.7

0.4
0.2
1.0
30.4

0.5
0.1
1.3
19.4

0.6
0.1
1.8
13.2

0.9
0.4
2.5
8.9

Oil&Gas

22

India Equity Research

GAIL(India)

AnalystCertification
I,GouriMishra,PGDBM,researchanalystandauthorofthisreport,herebycertifythatalloftheviewsexpressedinthisdocumentaccuratelyreflectourpersonalviewsaboutthe
subject company/companies and its or their securities. We further certify that no part of our compensation was, is or will be, directly or indirectly related to specific
recommendationsorviewsexpressedinthisdocument.

Disclaimer
ThisdocumenthasbeenpreparedbyAvendusSecuritiesPrivateLimited(Avendus).Thisdocumentismeantfortheuseoftheintendedrecipientonly.Thoughdisseminationtoall
intendedrecipientsissimultaneous,notallintendedrecipientsmayreceivethisdocumentatthesametime.Thisdocumentisneitheranoffernorsolicitationforanoffertobuy
and/orsellanysecuritiesmentionedhereinand/orofficialconfirmationofanytransaction.Thisdocumentisprovidedforassistanceonlyandisnotintendedtobe,andmustnot
betakenas,thesolebasisforaninvestmentdecision.Theuserassumestheentireriskofanyusemadeofthisinformation.Eachrecipientofthisdocumentshouldmakesuch
investigationashedeemsnecessarytoarriveatanindependentevaluation,includingthemeritsandrisksinvolved,forinvestmentinthesecuritiesreferredtointhisdocument
andshouldconsulthisownadvisorstodeterminethemeritsandrisksofsuchinvestment.Theinvestmentdiscussedorviewsexpressedmaynotbesuitableforallinvestors.This
documenthasbeenpreparedonthebasisofinformationobtainedfrompubliclyavailable,accessibleresources.Avendushasnotindependentlyverifiedalltheinformationgiven
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areinconsistentwithandreachadifferentconclusionfromtheinformationpresentedinthisdocument.
Avendusgenerallyprohibitsitsanalystsandpersonsreportingtoanalystsfrommaintainingafinancialinterestinthesecuritiesorderivativesofanycompanythattheanalysts
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AnycommentorstatementmadehereinaresolelythoseoftheanalystanddonotnecessarilyreflectthoseofAvendus.

DisclosureofInterestStatement(asofSeptember17,2010)

GAILIndia
GujaratNarmadaValleyFertilizers

Analystownership
ofthestock

Avendusoritsassociate
companysownershipof
thestock

Brokingrelationshipwith
AvendusSecurities

InvestmentBanking
mandatewithassociate
companiesofAvendus

No
No

No

No

No

No

No

No

GujaratStateFertilizers

No

No

No

No

GujaratStatePetronet

No

No

No

No

NationalthermalPowerCorporation

No

No

No

No

OilIndia

No

No

No

No

OilandNaturalGasCorporation

No

No

No

No

PetronetLNG

No

No

No

No

RelianceIndustries

No

No

No

No
No

TorrentPower

No

No

No

IndraprasthaGas

No

No

No

No

ChinaGasHolding

No

No

No

No

Oil&Gas

23

India Equity Research

GAIL(India)

OUROFFICES
Corporateoffice

InstitutionalBroking

Bangalore

NorthAmerica

IL&FSFinancialCentre,

IL&FSFinancialCentre,

TheMillenia,TowerA,

100ParkAvenue

BQuadrant,5thFloor,

BQuadrant,6thFloor,

#1&2,10thFloor,MurphyRoad,

16thFloor,

BandraKurlaComplex

BandraKurlaComplex

Ulsoor,Bangalore8.India.

NewYork,NY10017

Bandra(E),Mumbai400051

Bandra(E),Mumbai400051

T:+918066483600

T:+12123515066

T:+912266480050

T:+912266480090

F:+918066483636

F:+14842312343

F:+912266480040

Oil&Gas

24