Buy GAIL Ltd For Target Rs.200 by Motilal Oswal Financial Services Ltd
Strong 1H on trading gains; transmission improves
* In 2QFY27, GAIL’s standalone EBITDA came in 36% above our estimate at INR64.1b (consensus: INR45.2b). The beat in results was largely attributed to strong performance in natural gas trading and LPG & liquid HC segments. GAIL’s 2QFY27 gas transmission EBIT came in line with our estimate, while the EBIT of the Marketing segment and LPG & Liquid hydrocarbon segments came in 43%/65% above our est. The operating loss of the petchem segment came in below our est. Reported PAT stood 40% above our estimate at INR46.5b (est.: INR33.3b) (consensus: INR30.3b) as interest cost stood above estimate while other income and PAT stood below our estimates.
* Things we liked about the result:
1) Natural gas transmission was strong at 130mmscmd in 2QFY27 (driven by power and fertilizer sectors), beating our estimates by 6%. Further, management has upgraded FY27 transmission volume guidance to 126-127mmscmd (vs. 123mmscmd earlier).
2) Crossindex sale enabled GAIL to generate gas marekting EBIT of INR67.7b. The management has upgraded its PBT guidance for FY27 to INR90-95b.
3) Petchem EBITDA turned positive to INR900m in 2QFY27, supported by a favourable gas sourcing mix.
* Key investor concerns:
1) LPG realizations declined in 2QFY27, resulting in lower segmental profitability QoQ.
2) The gradual reversal of the GCC-toBrent pricing swap benefit shall weigh on gas marketing profitability in 2HFY27.
3) A potential increase in System Use Gas pricing could impact profitability of the gas transmission segment.
* Key monitorables:
1) JHBDPL, KKMBPL Phase 2, Gurdaspur-Jammu, and C2- C3 pipeline are scheduled for completion in FY27.
2) The 1,250 KTA PTA facility at GMPL is in advanced commissioning, while the 500 KTA PDH-PP plant is targeted for completion in Jun’27.
3) Konkan LNG terminal ambient heating system is scheduled for partial commissioning by Mar’27 and full commissioning by Sep’27 to enable 5 MTPA throughput handling 80 cargoes annually.
4) Any update on the INR15/mmbtu tariff hike petition, which could act as a key trigger for the stock.
* Valuation and view: GAIL’s valuations have corrected sharply from their Sep’24 highs, and the stock now trades close to its historical averages at ~1x one-year forward core P/B (ex-investment value), offering a limited downside, driven by attractive dividend yield and robust FCF outlook. Reiterate BUY with a TP of INR200.
* We reiterate our BUY rating on GAIL with our SoTP-based TP of INR200. Over FY26-28, we estimate a 24% CAGR in PAT, driven by:
* an increase in natural gas transmission volumes to 128mmscmd in FY28 from 122mmscmd in FY26
* healthy profitability in the gas marketing business, supported by management’s FY27/28 PBT guidance of at least INR90/45b.
* We expect RoE to stabilize at ~12% in FY28, with a healthy FCF generation of INR144b over FY27-28, which we believe can support its valuations.
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