Buy GAIL (India); target of Rs 128: Sharekhan

Sharekhan's research report on GAIL (India)

Standalone operating profit/PAT of Rs. 307 crore/Rs. 604 crore, up 18%/146% q-o-q was significantly below our estimates due to weak performance from gas transmission/petchem segments, partially offset by a higher income and lower tax outgo. Gas transmission EBITDA of just Rs. 297 crore was affected by several one-offs totaling Rs. 730 crore, while petchem EBITDA losses remained high at Rs. 257 crore, as it still has impact of global LNG supply concern. The gas trading/LPH-LHC segment posted a strong q-o-q earnings recovery supported by higher volume/margins for the trading biz and lower cost for LPG-LHC segment. After a dismal FY23 performance, we expect GAIL’s earnings to witness a strong recovery in FY24 supported by an improving outlook across its business. Gas transmission to benefit from higher tariff/volumes; petchem to turnaround on improved LNG supply and lower gas cost while LPG-LPG margin to improve from APM gas price cap. Management expects gas trading EBITDA of Rs. 3,500 crore in FY24. Overall, we expect 79% y-o-y PAT growth for GAIL in FY24.

Outlook

We have been neutral on GAIL since Q1FY23 due to earnings concern because of volatile LNG supply/price post Russia-Ukraine conflict. We believe that major headwinds are over for GAIL with normalizing LNG supply/price and thus we upgrade GAIL to Buy (from Hold) with an increased PT of Rs. 128. Valuation of 5.4x FY25E EV/EBITDA is at steep discount to historical average of 8.4x and stock offers healthy dividend yield of 5-6% on FY25E EPS.

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