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MOSL: GAIL INDIA (Buy)-Déjà vu – hive-off on cards in near term

GAIL India: Déjà vu – hive-off on cards in near term

(GAIL IN, Mkt Cap USD7.6b, CMP INR121, TP INR155, 28% Upside, Buy)

 

-          According to media , the Oil Ministry has moved the cabinet, seeking approval to split GAIL’s pipeline business into a separate entity.

-      The cabinet is likely to consider the proposal shortly. Post approval, a consultant will be appointed to carry out the transfer of assets to a separate entity (taking additional ~8-10 months to complete).

-      This is in line with our stance () that carving out the transmission segment as another subsidiary of GAIL is the best alternative. Our discussions with various experts suggest that while separation of the transmission segment from marketing is inevitable, it may not be possible for the transmission segment to survive independently on its own. 

Various concerns remain

-      In the Union Budget 2020, the Indian government has proposed increasing the length of gas pipeline in the country (from 15,700km to 27,000km).

-      However, companies have been reluctant to build the trunk pipeline infrastructure without incentives, as the project is capex heavy and utilization rates are trending lower. This has led to lower IRRs and made the business infeasible.

-      GAIL did not start executing the Jagdishpur-Haldia-Bokaro-Dharma (JHBDPL) pipeline until it received approval for Viability Gap Funding (VGF) of ~40% of the estimated INR129.4b project cost. Similarly, Indradhanush Gas Grid Limited (IGGL) has recently got VGF approval of ~60% of the estimated INR92.7b pipeline cost.

-      If GAIL’s transmission segment is sold off, it remains unclear if a private player is willing to invest in a low IRR pipeline business or if the government is willing to assist them with cardinal VGF.