MOSL: GAIL India (Downgrade to Sell)- A case for lower PE-US contracts pose threat of losses

​GAIL India: A case for lower PE; US contracts pose threat of losses; downgrading to Sell

(GAIL IN, Mkt Cap USD10.1b, CMP INR403, TP INR357, 11% Downside, Downgrade to Sell)

• ​GAIL is likely to find it challenging to get customers for the 5.8mmtpa import contracts it has signed with US companies. A hit of USD1/mmBtu on these long-term take-or-pay contracts could wipe out ~20% of its EBITDA.
  
• Incremental benefits from transmission, trading and petrochemicals are limited. Return ratios are likely to be under stress due to capex on long-gestation pipeline projects.
  
• We revise our stock rating to Sell. Our target price of INR357 implies 11% downside.
  
• US shale contracts turn expensive in current environment
  
• GAIL has a total of 5.8mmtpa contracts signed with two US companies - 3.5mmtpa with Cheniere and 2.3mmtpa with Dominion Cove.
  
• Due to high liquefaction and transportation cost, they are priced 20-30% higher than spot LNG in Asia-Pacific. As a result, GAIL has been unable to find customers, though offtake is expected to commence latest from early 2018.
  
• We do not see destination change to Europe as very lucrative due to low-pricing environment in Europe. Unless the central government initiates some policy intervention to take care of these volumes, we expect a hit of INR20b annually for every USD1/mmBtu decline in realization.