IGI Logo

Tariff hikes & volume uplift key catalysts in 2HFY26-27

* GAIL’s standalone EBITDA came in 5% above our estimate at INR31.9b. While gas transmission EBIT missed our estimate by 6%, the marketing segment posted a strong performance, and 1HFY26 EBIT now forms ~50% of the guidance of INR45b. Petchem sales were above our estimate at 209tmt, while the petchem segment reported an EBIT loss of INR3b.

* While management cut its FY26 transmission guidance to 123-124mmscmd, this reduction is largely known and in the price now. Transmission volumes are nearbottom and should see a sharp rebound in FY27 as 1) power demand normalizes, 2) the impact of one-off flood-related disruptions to specific pipelines wanes, and 3) there is a steady demand growth from the city gas distribution sector. While the tariff hikes (not built into our numbers yet) have been much delayed, we remain hopeful of a favorable outcome in 3QFY26.

* GAIL’s valuations have corrected sharply from their Sep’24 highs, and the stock now trades close to its historical averages at ~1.1x one-year forward core P/B (exinvestment value), offering limited downside driven by attractive dividend yield and robust FCF outlook. Further, the anticipated transmission tariff revision effective from Jan’26 is likely to raise the FY27E PAT by ~11% (revised TP: INR228), serving as a key near-term catalyst. Reiterate BUY with a TP of INR205.

Key highlights from the management commentary

* While the tariff outcome has seen a significant delay, management remains confident of an announcement in the coming months.

* Transmission volumes are guided to improve from 123–124 mmscmd in FY26 to 132–133 mmscmd in FY27, supported by higher offtake from CGD, power, and new pipeline connections, as well as upcoming refinery and fertilizer plant linkages.

* The Dabhol terminal is now fully all-weather capable, though utilization remains constrained pending heating system commissioning by FY27.

* Petchem margins remain under pressure amid high HH-linked gas prices.

* Capex stood at INR16.6b in 2QFY26, with major spending toward pipelines and petchem projects.

* The CGD business continues to expand its footprint with 213 CNG stations and 4.5 lakh DPNG connections, targeting further additions ahead.

Results in line amid a strong marketing performance

* In 2QFY26, GAIL’s standalone EBITDA was 5% above our estimate at INR31.9b. While gas transmission EBIT missed our estimate by 6%, the marketing segment posted a strong performance, and 1HFY26 EBIT now forms ~50% of the guidance of INR45b.

* Operating loss at the petchem segment widened QoQ despite a strong 18% pick-up in volumes amid elevated Henry Hub prices.

* LPG segment’s profitability also remained weak, with EBIT declining 55% despite 2% higher volumes YoY.

* Reported PAT came in 5% above our estimate at INR22.2b, as other income and sales were above our estimates.

* Operational performance:

* Natural gas transmission volume came in line with our estimate at 123.6mmscmd.

* NG marketing volume came in above our estimate at 105.9mmscmd (our estimate 93.5mmscmd).

* Petchem sales were below our estimate at 209tmt, while the petchem segment reported an EBIT loss of INR3b.

Valuation and view

* We reiterate our BUY rating on GAIL with our SoTP-based TP of INR205. Over FY26-28, we estimate a 7% CAGR in PAT, driven by:

* an increase in natural gas transmission volumes to 132mmscmd in FY28 from 123mmscmd in FY26;

* substantial improvement in the petchem segment’s performance over FY27-28, as the new petchem capacity will be operational and spreads are bottoming out;

* healthy profitability in the trading segment, with guided EBIT of at least INR40b in FY26/FY27.

* We expect RoE to stabilize at ~12% in FY27/28, with a healthy FCF generation of INR153b over FY26-28, which we believe can support its valuations.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412