GAIL India gains 2% after Reliance Securities initiates coverage with buy call

GAIL India gained 1.6 percent to close at Rs 340.55 on Thursday after Reliance Securities initiated coverage with a buy recommendation and an SOTP-based target price of Rs 382, implying 12 percent upside.

The brokerage expects the state-owned natural gas distributor to witness 9 percent earning CAGR through FY19-21E backed by swing in gas volume from HVJ (Hazira - Vijaypur -Jagdishpur) (low tariff) to DVPL (Dahej-Vijaipur pipeline) (higher tariff), as the company will continue to swing in gas volume from HVJ to DVPL.

Further the Petroleum and Natural Gas Regulatory Board (PNGRB) is likely to upwardly revise HVJ and DVPL tariff in next 6-8 months, it said, adding post simulating the impact of final orders for HVJ and DVPL, model suggests that the tariff for DVPL can increase by Rs 11.5/MMbtu, while HVJ can witness rise by Rs 31.1/MMbtu.

In order to reduce higher cost to the last consumer, the government proposed single tariff (unification) across pipelines.

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Reliance Securities expects the final decision in this regard after 6-8 months (post General Elections).

GAIL pleads for a flat tariff of Rs 57/MMbtu for its major pipelines versus existing average of Rs 39/MMbtu.

In case unified tariff is approved, GAIL's EBITDA could rise by Rs 2,390 crore in FY20, said the brokerage house.

Based on company guidance, Reliance Securities said GAIL will be able to bring up the utilisation level of its polyethylene (PE) plant from 74 percent in FY19 to 90 percent in FY20 and 98 percent in FY21.

Over FY15-18, PE margins have been very high. Despite addition of new PE production, petrochemical margins of 9MFY19 were higher on YoY basis.

GAIL has introduced Metallocene a value-added product, which will improve the overall petrochemical realisation and expected to contribute 15 percent to the total sales volume, said the brokerage which expects petrochemical EBITDA to grow by 20 /27 /30 percent in FY19/FY20/FY21.

It expects GAIL to witness a strong free cash flow generation of Rs 8,000 crore over FY19-FY21.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions. First Published on Feb 28, 2019 03:55 pm