Buy Gail Ltd for the Target Rs 205 by Motilal Oswal Financial Services Ltd
NIPU-2026: A game changer for India's gas demand outlook
India's natural gas demand is poised to enter a structurally stronger growth phase, with consumption likely to accelerate to 5-6% CAGR over FY26-31 (vs. 3.2% over FY16-26). The acceleration will be driven by three key factors:
(1) ~20mmscmd of incremental gas demand from 8-9 new urea plants to be set up under the government's NIPU-2026 policy (additional ~2.5mmscmd from the 1.27mmtpa Namrup-IV urea project by FY29)
(2) ~28mmscmd of incremental CGD demand (assuming 10% CAGR over FY26-31)
(3) ~20mmscmd of incremental demand from refinery and petrochemical expansions (source: PNGRB). We believe this structural demand uptrend should support sustainable growth in GAIL's transmission and gas marketing volumes over the medium term. Meanwhile, GAIL's valuations have corrected materially from their Sep'24 highs, with the stock now trading close to its historical average of ~1x one-year forward core P/B. We believe it offers an attractive risk-reward given a healthy dividend yield and a robust free cash flow outlook. Reiterate BUY with a TP of INR205.
NIPU-2026 provides a favorable investment framework
* The Union Cabinet recently approved the National Investment Policy for Urea2026 (NIPU-2026) to incentivize fresh investments in gas-based urea manufacturing and accelerate India's goal of urea self-sufficiency.
* Compared with the earlier New Investment Policy 2012 framework, the new policy introduces a more attractive investment structure, including a 12-16% assured post-tax Return on Equity (RoE) (subject to efficiency norms), greater transparency through the separation of fixed and variable costs, and mitigation of foreign exchange risk by converting fixed costs into INR after four years.
* As per media articles, 8-9 fertilizer plants are expected to be added (10mmtpa), which would require gas supply of 20mmscmd. Further, the 1.27mmtpa Namrup-IV urea project is also expected to add ~2.5mmscmd of incremental natural gas demand by FY29
Trading at 1x one-year forward core P/B; robust FCF outlook, 2.6% FY27 dividend yield
* GAIL’s core business (excl. listed and unlisted investments) currently trades at 1x one-year forward P/B, marginally above its five-year LTA valuation. Valuations have corrected sharply from the highs of 1.7x one-year forward core P/B in Sep’24. As such, we see limited downside for the stock from the current levels, given FY27/28 ROE of ~12%.
* Free cash flow generation for GAIL is likely to remain robust (INR107.5b over FY27-28E) as the multi-year capex cycle tapers off. We are currently not building in any capex for the fertilizer plants since the final investment approval is pending.
* GAIL’s dividend yield stands at an attractive 3.4%/3.3% in FY27/28. The current dividend yield is ~35-40% above the median/average 10-year dividend yield.
Valuation and view
* We reiterate BUY on GAIL with our SoTP-based TP of INR205. Over FY26-28, we estimate a 27% CAGR in PAT, driven by:
* an increase in natural gas transmission volumes to 127mmscmd in FY28E from 122mmscmd 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 FY27/28E, with a healthy FCF generation of INR107.5b over FY26-28E, which we believe can support its valuations.
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