MOSL: GAIL INDIA (Sell)-Making room for higher crude oil price-Remain concerned on US contracts

​GAIL India: Making room for higher crude oil price; Remain concerned on US contracts; higher tariffs pose upside risk

(GAIL IN, Mkt Cap USD12.3b, CMP INR465, TP INR376, -19% Downside, Sell)

• Since our last update, Brent has jumped to ~USD60/bbl. Higher Brent would help both petchem and LPG segments.
  
• In this update, we factor in higher Brent and changes in valuation of investments, and roll over our target price to September 2018E.
  
• Our concern on profitable placement of US contracts remains. While our target price is revised from INR334 to INR376, we maintain our Sell rating. Nevertheless, we also highlight the upside risk due to unified tariffs.
  

Higher crude oil helps in better petrochemical/LPG profitability

• ​-We estimate that at full utilization, a USD5/bbl rise in Brent would increase GAIL’s petchem EBITDA by 11%. LPG/HCs segment would add another ~17%.
  
• -As a result of change in our crude oil assumption from USD55/bbl to USD60/bbl for FY19, we increase our EBITDA estimate from INR87b to INR88b.
  
• Unified tariffs could be a risk
  
• -GAIL has asked for unified tariff of INR57/mmBtu to take care of lower capacity utilization, to improve RoE, and to ensure lower tariffs for new pipelines like Jagdishpur-Haldia-Bokaro-Dhamra.
  
• ​-We estimate that this could increase EBITDA by INR21.5b or ~24%, and could translate to 27% of FY19E EPS.