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Reduce GAIL – Kotak

November 12, 2007

Kotak Securities just a while ago has changed the recommendation on Gas Authority of India Ltd from ADD to REDUCE. There is no real reason for the re-rating of the stock.

The increase to the street’s expectations of likely steep increase in GAIL’s earnings from its proposed investment (Rs180 bn) in new pipelines. Expect GAIL’s gas transportation volumes to jump up sharply beyond FY2010E but our view of the stock is tempered by (1) potential inimical gas pipeline transportation regulations, (2) unsustainable nature of earnings of LPG and petrochemical businesses and (3) short-term negative surprise from potential increase in subsidy burden.

Here is the Sum of the Parts Valuation of GAIL and Target Price
Natural Gas Transportation – Rs 135
LPG Production – Rs 104
Petrochemicals – Rs 29
Oil & Gas Upstream – Rs 21
Investments in ONGC and Others – Rs 79
Cash – Rs 26

Hence based on SOTP, GAIL has a target price of Rs 380 / share.

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