GAIL (India) Ltd. INR 346

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. 11560mn 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. -2370mn 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. 22.3. We recommend BUY on the stock with a price of INR. 409/share. Key Financials Particulars (INR mn) FY14 FY15 FY16E FY17E Net Sales 572,450 567,420 534,880 672,410 EBITDA 67,010 46,960 34,970 48,260 PAT 40,300 30,390 18,170 28,230 EPS 31.8 24.0 14.3 22.3 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) 12684.8 Mkt Cap (INR Mn) 435722 52 Wk H/L (INR) 429/260 Volume Avg (3m K) 1864 Face Value (INR) 10 Bloomberg Code Market Info: GAIL IN SENSEX 24020 NIFTY 7298 Price Performance 100 80 60 Sensex Share Holding pattern (%) Particulars Dec15 Sep15 Jun15 Promoters 56.74 56.11 56.11 FIIs 16.67 16.4 18.62 DIIs 24.1 23.85 21.77 Others 2.49 3.64 3.5 Total 100 100 100 Source: BSE Vaibhav Chowdhry vaibhav.chowdhry@krchoksey.com 91-22-6696 5429 www.krchoksey.com 91-22-6696 5555 91-22-6691 9569 GAIL KRChoksey Research is also available on Bloomberg KRCS<GO>, Thomson Reuters, Factset and Capital IQ February 10, 2016

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 133800 140880 149340-5% -10% Other Operating income 720 770 360-7% 101% Net Sales 134520 141650 149690-5% -10% Raw materials consumed 9000 8250 13750 9% -35% Purchase of finished goods 9,9470 10,2490 113960-3% -13% Increase/(decrease) in stock 220 7010-1180 -97% -119% COGS 108690 117750 126540-8% -14% Gross Profit 25820 23900 23160 8% 12% Gross Profit Margin (%) 19.20% 16.87% 15.47% Expenditure Break up Staff cost 2630 2580 2440 2% 8% Other Operating expenses 11630 12880 10860-10% 7% Total Operating Expenditure 122950 133210 139840-8% -12% EBITDA 11560 8440 9860 37% 17% EBITDA Margin 8.60% 5.96% 6.58% 44% 31% Depreciation 3330 3230 2510 3% 33% EBIT 8230 5220 7350 58% 12% Interest 1580 1640 850-3% 86% Other Income 2570 3020 1400-15% 83% Exceptional items 630 PBT 9220 6600 8530 40% 8% Total tax 2580 2190 2490 17% 4% Effective tax rate (%) 27.94% 33.25% 29.16% Current tax 880-200 930-549% -5% Deferred tax 1690 2390 1560-29% 8% Rep PAT 6640 4410 6040 51% 10% Net Profit Margins 4.94% 3.11% 4.04% EPS 5.2 3.5 4.8 51% 10% Operational Details Q3FY16 Particulars Unit Q3FY16 Q2FY16 Q3FY15 Y-o-Y Q-o-Q Natural Gas Transmission mmscmd 97 90 94 8% 3% LPG Transmission 000 MT 692 687 773 1% -10% Production Petchem 000 MT 94 85 119 11% -21% LPG 000 MT 231 204 270 13% -14% OLHC 000 MT 64 52 59 23% 8% Sales Natural Gas mmscmd 77.12 74 74.08 4% 4% Petrochem 000 MT 84 84 112 0% -25% LPG 000 MT 231 204 269 13% -14% OLHC 000 MT 63 51 61 24% 3% 2 KRChoksey - Institutional Research

Segmental Performance - Transmission Services Segment Revenues (INR mn) Q3FY16 Q2FY16 QoQ% Q3FY15 YoY% Natural Gas 9790 10600-7.7 9950-1.6 LPG 1130 1120 0.3 1070 5.2 Natural Gas Trading 116870 122180-4.3 131670-11.2 Petrochemicals 7290 7980-8.7 12460-41.5 LPG And Liquid Hydrocarbons 8280 7480 10.7 10540-21.5 Unallocated 2120 2350-9.6 2030 4.5 Total 145460 151710-4.1 167720-13.3 Less: Inter-Segment Revenue 11660 10830 7.7 18380-36.5 Income from operations 133800 140880-5.0 149340-10.4 Segment Gross Profit (INR mn) Q3FY16 Q2FY16 QoQ% Q3FY15 YoY% Natural Gas 6290 7690 33.5 6820 56.0 LPG 680 710-24.5 690 22.4 Natural Gas Trading 4870 1960-43.4 530 57.6 Petrochemicals -660-1430 31.9 280-180.8 LPG And Liquid Hydrocarbons (before subsidy) 2460 870-69.9 2560-90.5 Unallocated -500 1660 514.8 1010-19.8 Total 13140 11460 2.1 11890-50.4 Segment PBIT (INR mn) Q3FY16 Q2FY16 QoQ% Q3FY15 YoY% Transmission Services Natural Gas 4280 5760-25.7 5080-15.8 LPG 540 580-6.4 540 0.2 Natural Gas Trading 4830 1930 151.1 510-845.3 Petrochemicals -1610-2370 32.2 50-3,466.0 LPG And Liquid Hydrocarbons (before subsidy) 2330 720 222.6 2420-4.0 Unallocated -120 1100-111.0-90 28.1 Total 10250 7710 32.9 8510 20.5 Less: Interest 1580 1640-3.2 850 86.1 Less: Other Unallocable Exp net off Unallocable Income 1980 2380-16.9 1460 35.9 Less: subsidy -2530-2900 -13.0-2320 8.7 Total Profit Before Tax 9220 6600 39.7 8530 8.1 Realizations and tariffs Q3FY16 Q2FY16 QoQ% Q3FY15 YoY% Average NG Trasmission Tariff INR/mscm 1,120 1,309-14.4 1,150-2.6 Average LPG Trasmission Tariff INR/mt 1,629 1,636-0.4 1,386 17.5 Natural gas trading (INR/mscm) 16,837 18,345-8.2 19,319-12.8 Petrochemical realisation(inr/'mt) 86,745 95,012-8.7 111,246-22.0 LPG Realisation(INR/'MT) 28,054 29,213 57.0 24,963 12.4 Profit & loss Account Revenues 402810 473330 572450 567420 534880 672410 EBITDA 58150 65350 67010 46960 34970 48260 Depreciation (7910) (9810) (11760) (9740) (12670) (15330) EBIT 4320 6980 8990 8610 9220 14340 Other income 54560 62530 64240 45830 31510 47260 Interest (1160) (1950) (3660) (3610) (5020) (5020) PBT 53400 60580 60570 42850 26490 42240 Tax (16860) (20360) (20270) (12450) (8320) (14020) PAT 36540 40220 40300 30390 18170 28230 EPS 28.8 31.7 31.8 23.96 14.3 22.3 3 KRChoksey - Institutional Research

Balance sheet Share capital 12680 12680 12680 12680 12680 12680 Reserves & surplus 203560 229590 258040 278510 350470 398000 Shareholders' funds 216240 242280 270720 291190 363150 410680 Long-term borrowings 48890 81410 95260 78150 91050 95000 Other non-current liabilities 23840 33450 37420 59660 32100 48000 Current liabilities 101860 89710 94710 99930 148520 150000 Total (Equity and Liabilities) 390850 446840 498110 528930 634820 703680 Non-current assets 296170 356300 385610 422990 511190 544800 Fixed assets (Net block) 238000 286850 312040 321200 439140 456000 Non-current Investments 35490 36800 41030 43240 43800 45800 Long-term loans and advances 19960 25910 25350 34450 25000 28000 Other non-current assets 2720 6730 7180 24100 3250 15000 Current assets 94680 90540 112500 86860 86860 92000 Cash & current investment 9310 23970 26510 11410 26440 34000 Other current assets 85370 66570 85990 7670 10340 32880 Total (Assets) 390850 446840 498110 528930 634820 703680 Cash flow statement Profit before tax 53400 60580 60570 42850 26490 42240 Depreciation 7910 9810 11760 9740 12670 15330 Change in working capital (1700) 900 (13410) 48290 (7650) 5600 Total tax paid (15510) (15040) (17610) (12450) (8320) (14020) Others (3150) (5030) (5320) (730) (500) (800) Cash flow from operating activities 40940 51210 36000 87690 22700 48360 Capital expenditure (63410) (58660) (36950) (108160) (25000) (25000) Change in investments (9660) (1700) (3840) (270) (3000) (4500) Others 2330 2970 8530 9180 4750 5000 Cash flow from investing activities (70750) (57390) (32260) (99250) (23250) (24500) Free cash flow (29800) (6180) 3740 (11560) (550) 23860 Debt raised/(repaid) 29160 32510 13850 (3530) (680) (4800) Dividend (incl. tax) (11050) (11050) (11050) (11050) (11050) (11050) Others (310) (1020) (3610) 60 1280 1500 Cash flow from financing activities 17800 20450 (810) (14520) (10450) (14350) Net change in cash (12000) 14270 2930 (26080) (11000) 9510 Key ratios Particulars FY12 FY13 FY14 FY15 FY16E FY17E EPS 28.8 31.7 31.8 24.0 14.3 22.3 DPS 10.2 7.5 10.4 7.5 7.5 7.5 Book Value/share 170.5 191.0 213.4 229.6 286.3 323.9 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 14.2 12.9 12.9 12.8 24.2 15.5 Debt/equity (x) 0.2 0.3 0.4 0.3 0.3 0.2 4 KRChoksey - Institutional Research

Date CMP Target Recommendation 10-Feb-16 346 409 BUY 04-Nov-15 306 376 HOLD 25-July-15 361 376 HOLD 28-May-15 381 385 HOLD 1-Nov-14 529 503 REDUCE 12-Aug-14 390 424 ACCUMULATE 27-May-14 410 424 HOLD 30-Jan-14 350 374 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. 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