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Re-rating on the cards…

…driven by a sharp improvement in ROE and FCF | Core earnings strong

? Fueled by rising transmission volumes and a turnaround in petrochemicals, we are forecasting GAIL’s ROE to improve to ~15% by FY26 from a low of 9.5% in FY23. A combination of the upcoming gas price-related tariff hikes, an EBITDA CAGR of 32% over FY23-26E, and onset of new projects can drive a re-rating in our opinion.

? Despite capex mounting 64% over FY24-26E (vs. avg. for FY19-23), we estimate that the company will report a free cash flow of INR45.6b in FY26. Further, we highlight optionality from GAIL Gas, which can provide value unlocking up to INR14.3/share for the parent (GAIL).

? We value the core business at 12x Dec’25E adjusted EPS of INR13.7, as we rollforward our valuations to Dec’25. Adding the value of listed and unlisted investments of INR30, we arrive at our revised TP of INR195. Our TP implies FY26E P/B of 1.6x. The stock is currently trading at an FY26E P/B of 1.3x. Reiterate BUY.

Earnings visibility higher as transmission contribution improves

? We introduce our FY26 estimates and project that transmission volumes would grow to 140mmscmd, clocking a 9% CAGR during FY23-26. The volume growth would be fueled by an increase in domestic gas output from Reliance Industries, ONGC, and Oil India.

? Gas consumption in India will also be aided by a notable rise in LNG regasification capacity over the next few years, as five new LNG terminals ramp up operations.

? Lastly, we expect a sizeable new liquefaction capacity coming online during CY24- 26, especially in the US and Qatar, which should keep spot LNG prices in check.

? Owing to the aforementioned factors, we anticipate that transmission EBITDA would account for 46% of total EBITDA in FY26, up from 40% in FY23. This should improve the earnings stability.

Improving demand, lower capacity additions to drive petchem turnaround

? We expect the petrochemical segment to become profitable at the EBIT level by FY26, driven by:

? Improvement in PE prices as CY23 was the peak year for new ethylene capacity additions;

? Petrochemical demand, which should start to pick up from 2HFY25E amid low inventories globally and improving macroeconomic conditions; - and ? Softer spot LNG prices, which should aid GAIL to move toward the USD10/mmBtu breakeven level in the petchem segment.

? Lastly, start-up of the new 500ktpa PDH-PP plant at Usar in FY26E at full utilization can add up to 9% to the standalone FY25E EBITDA.

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