GAIL (India) Ltd. INR 346

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1 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 India Equity Institutional Research Oil & Gas RESULT UPDATE GAIL (India) Ltd. INR 346 Good performance; Near term outlook looks stable BUY GAIL reported net profit of INR. 6640mn inline with street expectations mainly on account of increase in volumes from natural gas transmission. EBITDA came in at INR mn which was up on a QoQ and YoY due to lower other operating expenses and lower purchase of finished goods. Subsidy burden of the quarter was NIL. Transmission volumes stood at 97 mmscmd, up 3% YoY and 8% QoQ. Business Highlights Natural gas transmission business: Natural gas transmission volumes for the quarter stood at 97 mmscmd up 3% YoY and 8% QoQ. The increase is mainly on account of hgher gas pooling offtake. Transmission tariffs stood at INR. 1,120/mscm down ~14.4% on QoQ and ~2.6% YoY. Outlook for the segment remains positive as gas utilisation policy on idle power plants may incresase volume which in turn may increase tariffs. Reported EBIT stood at INR. 4280mn down 25.7% QoQ and 15.8% YoY. Natural gas trading business: Trading volumes stood at 77 mmscmd, up 4% QoQ and 4% on a YoY basis, the increase is due to increase in demand from stranded power plants. EBIT from the trading business was up 151.1% QoQ and 845% YoY to INR. 4830mn. Petrochemicals business: Petchem business continued to be under pressure maninly due to still higher raw material cost. GAIL s petchem segment gross margins declined to INR. -660mn as compared to INR -1430mn in Q2FY16 mainly on account of higher raw material cost. Volumes was up 11% QoQ and down 21% QoQ to 94,000 mt. EBIT stood at INR -1610mn as compared to INR mn in Q2FY16 and INR 322mn in Q3FY15. LPG & other liquid hydrocarbon business: GAIL reported EBIT in LPG and liquid hydrocarbons segment of INR. 2330mn versus INR. 720mn in Q2FY16 and INR 2226mn in Q3FY15. LPG sales volume stood at 231,000 mt in Q3FY16 compared to 204,000 mt in Q2FY16 and 270,000 mt in Q3FY15. Other liquid hydrocarbons volume was at 64,000 mt compared to 52,000 mt in Q2FY16 and 59,000 mt in Q3FY15, up mainly on account of higher demand. In terms of the decision of the Government of India to share the under recoveries (of oil marketing companies) on LPG, the company has provided NIL discount for the quarter as against INR. 5000mn in same quarter last year and Nil discount in the previous quarter of same year. Valuation We believe the long term prospects of the stock to be positive with new gas supplies however there are no near term triggers. Government has initiated to supply LNG to stranded power plants which will eventually increase transmission volumes and profitability despite decline in tariff s and margins. Petchem and LPG margin outlook remains weak in near term. We believe that although the transmission volumes have bottomed out and will pick up by mid of FY16 with the ramp up of Dhabol terminal, expansion of the Dahej terminal and ramp up of the volumes of Kochi terminal. Currently GAIL is trading at 15.5x FY17 EPS of INR We recommend BUY on the stock with a price of INR. 409/share. Key Financials Particulars (INR mn) FY14 FY15 FY16E FY17E Net Sales 572, , , ,410 EBITDA 67,010 46,960 34,970 48,260 PAT 40,300 30,390 18,170 28,230 EPS OPM (%) 12% 8% 7% 7% NPM (%) 7.0 5% 3% 4% Target Price (INR): 409 Potential Upside : 18.2% Market Data Shares outs (Mn) 1268 EquityCap (INR Mn) Mkt Cap (INR Mn) Wk H/L (INR) 429/260 Volume Avg (3m K) 1864 Face Value (INR) 10 Bloomberg Code Market Info: GAIL IN SENSEX NIFTY 7298 Price Performance Sensex Share Holding pattern (%) Particulars Dec15 Sep15 Jun15 Promoters FIIs DIIs Others Total Source: BSE Vaibhav Chowdhry [email protected] GAIL KRChoksey Research is also available on Bloomberg KRCS<GO>, Thomson Reuters, Factset and Capital IQ February 10, 2016

2 Other Highlights In terms of the decision of the Government of India to share the under recoveries (of oil marketing companies) on LPG, the company has provided Nil provisional discount for the quarter as against INR 5000mn in same quarter last year. Management clarified that they will not face any liability due to lower offtake of RasGas contract as they have back to back contracts mainly with Government companies and large corporate Management expects there is more upside left in pooling mechanism and believe the transmission volumes to rise further in future Other income increased significantly YoY due to higher dividend income GAIL imported 21 cargoes in the current quarter as compared to 13 quarters in Q2FY16. Capex guidance for FY15-16 to stand at INR 17000mn, FY16-17 at INR 15000mn and FY17-18 at INR 40000mn Q3FY16 Result Analysis Particulars (INR in mn) Q3FY16 Q2FY16 Q3FY15 Q-o-Q (%) Y-o-Y (%) Sales % -10% Other Operating income % 101% Net Sales % -10% Raw materials consumed % -35% Purchase of finished goods 9, , % -13% Increase/(decrease) in stock % -119% COGS % -14% Gross Profit % 12% Gross Profit Margin (%) 19.20% 16.87% 15.47% Expenditure Break up Staff cost % 8% Other Operating expenses % 7% Total Operating Expenditure % -12% EBITDA % 17% EBITDA Margin 8.60% 5.96% 6.58% 44% 31% Depreciation % 33% EBIT % 12% Interest % 86% Other Income % 83% Exceptional items 630 PBT % 8% Total tax % 4% Effective tax rate (%) 27.94% 33.25% 29.16% Current tax % -5% Deferred tax % 8% Rep PAT % 10% Net Profit Margins 4.94% 3.11% 4.04% EPS % 10% Operational Details Q3FY16 Particulars Unit Q3FY16 Q2FY16 Q3FY15 Y-o-Y Q-o-Q Natural Gas Transmission mmscmd % 3% LPG Transmission 000 MT % -10% Production Petchem 000 MT % -21% LPG 000 MT % -14% OLHC 000 MT % 8% Sales Natural Gas mmscmd % 4% Petrochem 000 MT % -25% LPG 000 MT % -14% OLHC 000 MT % 3% 2 KRChoksey - Institutional Research

3 Segmental Performance - Transmission Services Segment Revenues (INR mn) Q3FY16 Q2FY16 QoQ% Q3FY15 YoY% Natural Gas LPG Natural Gas Trading Petrochemicals LPG And Liquid Hydrocarbons Unallocated Total Less: Inter-Segment Revenue Income from operations Segment Gross Profit (INR mn) Q3FY16 Q2FY16 QoQ% Q3FY15 YoY% Natural Gas LPG Natural Gas Trading Petrochemicals LPG And Liquid Hydrocarbons (before subsidy) Unallocated Total Segment PBIT (INR mn) Q3FY16 Q2FY16 QoQ% Q3FY15 YoY% Transmission Services Natural Gas LPG Natural Gas Trading Petrochemicals ,466.0 LPG And Liquid Hydrocarbons (before subsidy) Unallocated Total Less: Interest Less: Other Unallocable Exp net off Unallocable Income Less: subsidy Total Profit Before Tax Realizations and tariffs Q3FY16 Q2FY16 QoQ% Q3FY15 YoY% Average NG Trasmission Tariff INR/mscm 1,120 1, , Average LPG Trasmission Tariff INR/mt 1,629 1, , Natural gas trading (INR/mscm) 16,837 18, , Petrochemical realisation(inr/'mt) 86,745 95, , LPG Realisation(INR/'MT) 28,054 29, , Profit & loss Account Revenues EBITDA Depreciation (7910) (9810) (11760) (9740) (12670) (15330) EBIT Other income Interest (1160) (1950) (3660) (3610) (5020) (5020) PBT Tax (16860) (20360) (20270) (12450) (8320) (14020) PAT EPS KRChoksey - Institutional Research

4 Balance sheet Share capital Reserves & surplus Shareholders' funds Long-term borrowings Other non-current liabilities Current liabilities Total (Equity and Liabilities) Non-current assets Fixed assets (Net block) Non-current Investments Long-term loans and advances Other non-current assets Current assets Cash & current investment Other current assets Total (Assets) Cash flow statement Profit before tax Depreciation Change in working capital (1700) 900 (13410) (7650) 5600 Total tax paid (15510) (15040) (17610) (12450) (8320) (14020) Others (3150) (5030) (5320) (730) (500) (800) Cash flow from operating activities Capital expenditure (63410) (58660) (36950) (108160) (25000) (25000) Change in investments (9660) (1700) (3840) (270) (3000) (4500) Others Cash flow from investing activities (70750) (57390) (32260) (99250) (23250) (24500) Free cash flow (29800) (6180) 3740 (11560) (550) Debt raised/(repaid) (3530) (680) (4800) Dividend (incl. tax) (11050) (11050) (11050) (11050) (11050) (11050) Others (310) (1020) (3610) Cash flow from financing activities (810) (14520) (10450) (14350) Net change in cash (12000) (26080) (11000) 9510 Key ratios Particulars FY12 FY13 FY14 FY15 FY16E FY17E EPS DPS Book Value/share Profitability ratio EBITDA (%) 14.4% 13.8% 11.7% 8.3% 6.5% 7.2% PAT(%) 9.1% 8.5% 5.4% 5.4% 3.4% 4.2% Return ratio (%) ROE (%) 16.9% 16.6% 14.9% 10.4% 5.0% 6.9% ROCE (%) 18.9% 17.5% 15.9% 10.7% 6.5% 8.5% P/E Debt/equity (x) KRChoksey - Institutional Research

5 Date CMP Target Recommendation 10-Feb BUY 04-Nov HOLD 25-July HOLD 28-May HOLD 1-Nov REDUCE 12-Aug ACCUMULATE 27-May HOLD 30-Jan ACCUMULATE Rating Legend Our Rating Upside Buy More than 15% Accumulate 5% - 15% Hold 0 5% Reduce -5% 0 Sell Less than -5% ANALYST CERTIFICATION: I Vaibhav Chowdhry (B.Com, MBA), research analyst, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & Conditions and other disclosures: KRChoksey Shares and Securities Pvt. Ltd (hereinafter referred to as KRCSSPL) is a registered member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX Stock Exchange Limited. 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