Buy Gail India

GAIL (India) (GAIL IN; Mkt Cap USD8.2b, CMP Rs409, Buy)
n GAIL reported 16% higher EBITDA at Rs11.6b v/s our estimate of Rs10b (up 93% YoY and 33% QoQ) on the back of higher contribution from petchem and LPG businesses. Lower subsidy at Rs3.87b (v/s est of Rs4.5b, Rs3.7b in 3Q, and Rs5b in 4QFY07) was a key surprise.
n Reported PAT at Rs7.2b (v/s est Rs7b) was up 16% QoQ and 112% YoY from adjusted PAT of Rs3.4b in 4QFY07.
n Higher petchem EBIT at Rs3.6b (up 21% YoY, 59% QoQ), mainly due to (1) 33% capacity expansion in end 3QFY08, and (2) lower gas availability and 3-week shutdown in 3QFY08.
n LPG and liquid HC EBIT at Rs3.5b (v/s Rs1.3b in 3QFY08 and Rs0.7b loss in 4QFY07) was a major surprise. The key reasons were: (1) lower subsidy burden, (2) higher production at 332kt (up 7% QoQ), and (3) higher LPG pricing environment.
n Gas transmission volumes were 82.2mmscmd (up 3% YoY, down 3.6% QoQ).
n We remain positive on GAIL and expect 66% increase in transmission volumes over the next two years. Existing and large plans for city gas distribution and E&P will provide added upsides. The concern on GAIL emanates from higher than current 1/3rd sharing of upstream burden, in view of rising overall under-recoveries. The stock trades at 11.6x FY09E EPS of Rs35.3 and 10.7x FY10E EPS of Rs38.3. We reduce GAIL's target price by 13% to Rs540, due to a 10% discount to DCF value and diminution in the value of investments. We maintain Buy on GAIL.

(See attached file: GAIL-20080513-MOSL-RU-PG008)

Indiabulls Real Estate (IBREL IN; Mkt Cap USD3.3b, CMP Rs540, Buy)
n Robust 4QFY08 results: Indiabulls Real Estate (IBREL) has posted consolidated revenues of Rs682m (v/s our estimate of Rs601m), other income of Rs845m, and PAT of Rs447m for 4QFY08. For FY08, the company has declared consolidated revenues of Rs1.4b (v/s our estimate of Rs1.3b), other income of Rs6.2b, and PAT of Rs4b.
n Strong traction in Power vertical: Indiabulls Power Services, a 71.5% subsidiary of IBREL, is working on a project pipeline of 5,447MW – thermal power projects of 1,320MW in Chattisgarh, 3,960MW in Maharashtra, and mid-sized hydro-power projects of 167MW. In Chattisgarh, it may add a similar-sized unit, which could be a key positive, if incremental units are sold on merchant basis. We expect cost of generation to be less than Rs1.3/unit.
n REIT plans at an advanced stage: IBREL has filed a prospectus with the Singapore exchange for the listing of Indiabulls Properties Investment Trust (IPIT), which will hold an initial portfolio comprising of IBREL’s Jupiter Mills and Elphinstone Mills projects. While the final pricing is yet to be decided, IBREL expects to raise US$235m from the REIT listing. We believe this would accelerate the monetization time for IBREL's commercial properties.
n Valuation and view: We have revised our NAV estimate for IBREL from Rs791/share to Rs778/share to factor in the change in development plans (as per REIT prospectus) and change in taxation (for the office space) for the Elphinstone Mills and Jupiter Mills projects. Our target price for IBREL is Rs778/share, in line with our revised NAV estimate, which does not include any value for (1) the retail and power vertical, and (2) acquisition of 134 acres in Dombivli-Kalyan. We maintain Buy.

(See attached file: IBREL-20080513-MOSL-RU-PG008)



Arvind Mills (ARVND IN; Mkt Cap USD0.3b, CMP Rs50, Neutral)
n Arvind Mills’ results for 4QFY08 were in line with our estimates. EBITDA was Rs708m v/s our est of Rs710m and revenue stood at Rs6.6b v/s our estimate of Rs5.8b - the variance was largely on account of ~Rs1b of cotton trading revenue booked during the quarter.
n EBITDA margin dropped 317bp YoY to 10.8% due to high cost push and cotton trading revenue. Reported PAT stood at Rs54m v/s our estimate of Rs96m due to Rs55m of exceptional losses. Adj PAT stood at Rs109m.
n Arvind is facing tremendous cost push pressure across all cost segments: (1) raw materials such as cotton, dyes and chemicals etc, (2) energy, and (3) manpower. In 4QFY08, Arvind’s fuel cost rose ~70% YoY as its previous agreement for natural gas expired and the company was forced to buy power from the grid.
n During 4QFY08, the revenue mix stood as: 26% from denim, 11% from shirtings, 16% from garments, 21% from brand/retail and others 26%. As a result of sharp increase in contribution from brand/retail and trading operations, Arvind’s dependence on denim declined to 26%, which is the lowest in the last five years.
n In the near to medium term, we expect Arvind’s margin to face increasing pressure due to the bleak denim scenario, higher cotton prices and increasing energy cost. The stock trades at 13x FY09E EPS of Rs3.9 and 7.7x FY10E EPS of Rs6.5. Maintain Neutral.