Brokerages keep faith in GAIL despite disappointing Q3 results

The market shrugged aside GAIL India's disappointing third-quarter results with the stock recouping early losses to gain around three percent intraday as brokerage firms indicated that scrip could be a good buy at this point in time.

At 11.48 am, shares of GAIL were trading at Rs 97.25, up 2.4 percent, on the BSE.

Motilal Oswal Financial Services said the stock is trading at around 27 percent discount to its one-year forward long-term P/E (Price to Earnings) average. The brokerage firm has a ‘buy’ rating on the stock with a target price of Rs 115.

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In the past three months, the scrip is up 6 percent while in the past year, it has hardly risen a percent. The stock has given over 20 percent returns in the past three years.

“Most of the pipelines are now up for tariff revision, which could be a big trigger for the stock,” said Motilal Oswal.

The management expects a gain of about Rs 10 per mmBtu (metric million British thermal units) in the overall tariff. However, taking into account the underperformance in Q3 of FY23, the brokerage firm has cut its FY23 EPS (earnings per share) estimate by 13 percent while keeping its FY24-25 numbers unchanged for now.

ICICI Securities said that GAIL delivered 11-quarter low earnings in Q3 of FY23 with EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) and net profit declining 94 and 93 percent YoY, respectively.

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The results

The state-owned gas utility firm's standalone net profit tanked 92 percent YoY to Rs 245 crore for the December quarter from Rs 3,287 crore a year ago. The company had posted a net profit of Rs 1,537 crore in the previous quarter.

According to the brokerage firm, key reasons for the company’s underperformance were Rs 1,100 crore-inventory loss due to a sharp decline in spot LNG prices, a dip in transmission and trading volumes and very weak petrochem utilisation along with higher costs and lower realisations for LPG segment.

ICICI Securities also slashed its FY23 and FY24 EPS (earnings per share) estimates by 18 percent and 13 percent to factor in this quarterly weakness. It trimmed its target price on the stock by about 9 percent to Rs 95.

However, the brokerage firm has maintained its "buy" call considering that prospects will improve materially over FY24-25 led by stronger volumes, higher tariffs and relative moderation in gas costs.

Jefferies, which has a "hold" recommendation on shares of GAIL with a target price of Rs 90, said the near-term earnings outlook looks challenging. It also sees higher costs negating some benefits from potential tariff hikes.

The foreign brokerage firm has lowered its EBITDA estimates for FY23 and FY24 to 24 percent and 8 percent, respectively.

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