GAIL – Tax Incentive for Pipeline Projects

We attempt to analyse the impact to GAIL’s DCF of the tax incentives provided in yesterday’s Union Budget for gas pipelines (Section 35AD – almost entire investment on gas pipelines to be made tax deductible).

As per our analysis DCF value could increase by ~Rs20/share (from Rs339 currently) due to the tax benefits accruing as the cash tax payable declines (only MAT for the first 6-7 years). While impact on cash flows is material, impact on earnings need not be meaningful as deferred tax component may also rise (if effective tax rate remains largely unchanged).

We assume a Rs240bn of capex over FY10-13E as per company guidance, (ii) tax benefit allowed only on all gas transmission earnings, (iii) accumulated losses allowed to be carried forward (if capex in a particular year exceeds gas segment earnings), and (iv) loss on the gas business cannot be set off against income from other businesses (viz. petchem, LPG). While there is still some uncertainty on some of the issues, we
expect these to sorted out given the government impetus for the sector.

EPS for FY10 is expected to be Rs 23 and for that for FY11 is expected to be Rs 24.30