15 October, 2008

GAIL (India)

Cmp: Rs 255.40

Target price: Rs 347

Morgan Stanley has given an ‘overweight’ rating to the stock saying it is trading at 9.8 times F2009E (estimated) EPS (earnings per share) and 8.8 times F2010E EPS, which is a 30-35% discount to global peers. “We rate Gail a must-own stock in today’s environment — it has high quality assets, which are not easily replicable giving it a virtual monopoly.

It is net cash positive equal to 35% of its asset base; and its earnings are reasonably defensive, especially from its transmission business,” said Morgan Stanley in a note to its clients. According to Morgan Stanley, the company is best positioned to take advantage of higher supply of natural gas, which is expected to increase by 150% over the next four years. “We believe Gail is best positioned to take advantage of higher supply.

It plans to invest close to Rs 180 billion in the next three-four years to build 5,000 km of new pipelines,” the note said. The firm has raised F2009-2010E EBITDA by 16% and 8%, respectively, and has increased the price target to Rs 347 from Rs 343, after adjusting for a 1:2 bonus issue. “We increase our net profit estimates by 11% for F2009 and 5% for F2010, based on the upside in petrochemical and higher gas transmission tariffs, factoring in lower gas transmission volumes. We now estimate F2008-2012 net profit CAGR of 12% pa (per annum),” the note added.