GAIL India
Current market price: Rs 416.25
Target price: Rs 529
Upside: 25.8%
Brokerage: ICICI Securities

ICICI securities had recommended GAIL India (GAIL), with a price target of Rs 529. according to their report GAIL  will benefit from gas grid expansion and improved visibility on gas supply from Reliance Industries’ (RIL) KG basin. The company plans to double its gas transmission capacity at a capex of Rs 28,000 crore in two phases, to be completed by FY12E.

This will increase its pipeline network to over 12,000 kms and its transmission capacity by 176 mmsmcd. This in turn will quadruple GAIL’s gas transmission EBITDA in the next seven years, and improve its risk profile based on enhanced annuity earnings from transmission and reduced share of cyclical earnings from LPG and petchem.

GAIL will fund the pipeline network expansion through 70 per cent debt and the remaining via equity. The company’s existing free cash-flows and retained earnings are adequate to fund the equity portion at Rs 8,400 crore.

Higher crude oil prices will lead to increased profitability of LPG and petchem on surging realisations (linked to crude price) and stable raw material prices (as gas price is regulated in India). This will offset the affect of higher subsidy burden on GAIL.

GAIL’s revenue is expected to grow at a CAGR of 11.3 per cent through FY09E-11E on the back of 20.2 per cent transmission volume CAGR and declining subsidy burden. The stock is currently trading at FY10E P/E of 11.1x, EV/EBITDA of 7.5x and P/BV of 2x.