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We upgrade GAIL to BUY from Add, on the back of a steady core business and earnings outlook along with attractive valuations, with unchanged TP of Rs200. Indian gas demand, despite the Strait of Hormuz crisis and higher LNG prices, has improved sequentially in 2Q, with Jul/Aug-26 recording only a 2% decline yoy. GAIL’s transmission volumes, hence, should improve qoq and, for FY27, may exceed the guidance of 123mmscmd. Additionally, while gas marketing profitability would decline qoq as formulaic trailing averages normalize, the guidance of Rs40-45bn for FY27 should still see a sizable beat given stable Henry Hub settlement prices as well as oil and spot LNG rates continuing to remain elevated. We build in Brent at $85/bbl, though the 1HFY27 average is likely to be ~$100/bbl; hence there is a potential upside to our estimates. The petchem segment, as a result, should report a better EBITDA qoq, with plant utilization expected at near-100% capacity. We slightly raise FY27-29E EPS by 2-3% each, updating the FY26 annual report data, and rollover to Sep-28E earnings. GAIL Gas’s IPO RFP has already been released and a potential listing next year can lead to value unlocking of its wide CGD interest. We conservatively value unlisted investments at 1x PBV.

Core businesses largely healthy; to exceed FY27 segmental guidance

GAIL’s core businesses—gas transmission, gas marketing, and petchem—are on a healthy trajectory. Despite the Middle East conflict and impact of Qatar LNG force majeure, Indian gas consumption has improved sequentially in 2Q, with the CGD and power sectors driving demand; also, GAIL’s gas pipeline volumes are expected to improve qoq. In marketing, while 1Q was an exceptional quarter, with 2Q likely to see relatively modest earnings, full-year earnings guidance of Rs40-45bn is expected to see a sizable beat as HH settlement prices have been range-bound amid strong oil and spot LNG rates. In petchem too, higher oil prices have supported PE realizations and, with near-100% plant utilization at Pata, EBITDA is expected to be positive vs marginal loss in 1QFY27. LPG realizations are down sequentially, but full-year earnings outlook is healthy.

Medium-term outlook stable; potential value unlocking of CGD investments

GAIL’s medium-term outlook is stable, as gas transmission volumes will continue growing structurally in our view, with increasing share of volumes in higher-tariff bid pipelines. Also, new LNG contracts are likely to lead to expansion in marketing volumes and stable marketing margins. GAIL’s new petchem projects, namely Mangalore PTA and Usar PDHPP, are also expected to be commissioned within 1-1.5Y, though we do not build in any contribution from this despite building in capex. Further, GAIL is venturing into fertilizers with two Urea projects (combined capacity: ~2.5mmtpa) along the Mumbai Nagpur Jharsuguda line (MNJPL). The projects would have an assured return of 12-16% while providing anchor volumes (4-5mmscmd) to the bid-out MNJPL. The GAIL Gas IPO could lead to value unlocking of GAIL’s wide unlisted CGD ownership.

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