Buy GAIL (India), target Rs 430: ICICI Direct

ICICI Direct has a buy call on GAIL (India) with a target price of Rs 430.

The current market price of GAIL (India) is Rs 367.05.

Time period given by the brokerage firm is one year when GAIL (India) price can reach the defined target.

View of ICICI Direct on the company:
Gail has two phases of petrochemical capacity (Pata I & new-Pata II) with a combined capacity of 800,000 metric tonnes per annum (TMTPA). The petrochemical segment witnessed a gradual ramp up post Pata-II with volumes at 673 TMT (nearly 84 per cent capacity utilisation) in FY18. The EBIT of the petchem segment in FY18 remained weak at Rs 261.2 crore. It witnessed quarterly fluctuations in profitability of petchem due to changes in gas mix (low cost domestic gas/high cost LNG). However, higher realisations due to increase in crude oil prices and lower raw material costs (US natural gas) will lead to improved performance in coming years. Going forward, we assume nearly 80 per cent and 100 per cent capacity utilisation for FY19E and FY20E, respectively, with EBIT at Rs 678 crore and Rs 860.3 crore during the respective periods. Subsequently, its petchem segment RoCE is expected to improve from 2.8 per cent in FY18 to nearly 9 per cent in FY20E.

Split plans in primary stage; valuations, prices to remain key: The petchem split plans are at a very nascent stage and may require Cabinet and the company's approval post which the government will wait for right valuations and plans. In case the petchem business is sold, it will lead to an improvement in Gail’s return ratios and benefit shareholders. On the core business front, PNGRB’s implementation of unified tariff plan will provide a significant movement in Gail’s performance. Incorporating the latest annual report numbers, we arrive at a target price of Rs 430. We have a BUY recommendation on Gail as a consolidated entity.