4 March 2020
Oil & Gas
TP: INR150 (+45%)
GAIL: reiterated subsiding US contract risks
Equity Shares (m)
52-Week Range (INR)
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Stock Performance (1-year)
Sensex - Rebased
The company organized a visit to its Horizontal Directional Drilling (HDD) Site at
Damodar river, Durgapur along with interaction with the senior management.
Please find main highlights of the same:
465.7 / 6.1
183 / 98
Phase-I of JHBDPL already commissioned; rest on track
Phase-1 of 753km from Phulpur to Dobhi, connecting Gorakhour, Patna and
Barauni has already been commissioned along with the six Geographical
Areas (GAs) on this length.
Phase-II of 901km connecting Dobhi to Durgapur and Dhamra to Angul is
expected to be completed by Dec’20. Phase-III of 1,001km from Bokaro-
Angul and Durgapur-Kolkata is also expected to be completed by Dec’20.
Barauni-Guwahati pipeline of 716km is expected to be completed by
Matix was already commissioned but had to stop as it did not receive the
minimum quantity of natural gas sufficient to keep the operations running.
GAIL is in the process of completing the ~1.5km HDD stretch across
Damodar river, post which, Matix would be able to receive gas from GAIL.
GAIL has already executed a firm contract for 1.5mmscmd with Matix. It is
expected to take additional 1mmscmd. Matix may also double its capacity
going forward, thereby increasing the demand of gas.
Consumers on Phase-II/III may face as much as USD2-3/mmBtu of
transmission tariff. This would be substantial compared with the domestic
APM price of USD3.6/mmBtu as well as spot LNG prices of ~USD3/mmBtu.
Such high transmission cost may force a radical change in tariff
determination bringing back the focus on unified tariffs.
The company guides that a wholly owned subsidiary may be created for
transmission in order to separate transmission and trading segments.
As we have highlighted in earlier reports, we expect GAIL to be a key
beneficiary of the National Green Tribunal’s focus on reducing industrial
The main concern on the stock is low spot LNG prices which may result in
losses in the US LNG contracts. However, with start of new fertilizer plants
on JHBDPL, the company expects all US contracts to be sold in India
GAIL is trading at 8.2x FY21 EPS of INR12.6 and 2.8x FY21 EV/EBITDA. It
trades at ~40% discount to long term one-year forward PE. We value it at 8x
adjusted FY22 EPS and add the value of investments to arrive at a target
price of INR150. Reiterate
Matix to take ~2.5mmscmd of gas
Expect radical changes before commissioning of Phase-II/III
Valuation and recommendation
Swarnendu Bhushan- Research Analyst
(Swarnendu.Bhushan@MotilalOswal.com); +91 22 6129 1529
Sarfraz Bhimani - Research Analyst
(Sarfraz.Bhimani@MotilalOswal.com); +91 22 6129 1566
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Investors are advised to refer through important disclosures made at the last page of the Research Report.