Buy GAIL Ltd for the Target Rs. 205 by Motilal Oswal Financial Services Ltd
Tariff hike key catalyst; valuations attractive now
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, offering limited downside driven by attractive dividend yield and robust FCF outlook. Further, the anticipated transmission tariff revision effective from Jan’26 is expected to raise the FY27 PAT by around 11% (revised TP: INR228/sh), serving as a key near-term catalyst. Transmission volumes are also set to rebound in FY27 as the impact of multiple one-off disruptions in FY26 wanes, with a recovery in power and fertilizer offtake and normalization of flood-impacted supplies. Government initiatives to further rationalize natural gas taxation can be a significant long-term positive. Reiterate BUY with a TP of INR205.
Trading at 1.1x one-year forward core P/B; robust FCF outlook, 2.6% FY27 dividend yield
* GAIL’s core business (i.e., excl. listed and unlisted investments) currently trades at 1.1x 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 current levels, given an FY27/28 ROE of ~12%.
* Free cash flow generation for GAIL is likely to remain robust (INR138.5b over FY26-28E) as the multi-year capex cycle tapers off, while no new mega projects have been announced yet.
* Dividend yield for GAIL stands at an attractive 2.6%/2.7% in FY27/28. The current dividend yield is ~35-40% above the median/average 10-year dividend yield.
Government initiatives to rationalize taxation on natural gas
* According to media reports and our channel checks, the Gujarat government has revised the tax on natural gas from a higher VAT rate to 2% CST, applicable only to APM and non-APM gas (excluding PLNG volumes). While IGL stands to benefit the most, the move signals progress towards rationalizing taxes for natural gas and eventually bringing it under GST.
* For GAIL, the rationalization of taxes for gas can be a long-term positive, supporting gas affordability and demand growth, especially in underpenetrated regions.
Tariff revision around the corner; expected to lift FY27 earnings by 11%
* We expect the long-awaited transmission tariff revision to be implemented from January onwards, which could raise GAIL’s FY27 PAT by around 11%. This remains a key catalyst for the stock.
* The hike would reflect higher operating costs and network expansion undertaken over the past few years, providing a steady boost to transmission earnings and overall profitability
Transmission volumes to rebound in FY27 as one-off disruptions wane
* Gas volumes are likely to recover meaningfully in FY27 as several one-off disruptions that hampered volumes in FY26 normalize next year.
* The power sector’s offtake, which collapsed this year due to weak power demand, could add around 2mmscmd in FY27. The fertilizer sector’s volumes are also expected to recover, though the permanent shutdown of one Kanpur-based plant (1.5-2mmscmd impact) will limit the upside. Further, according to our channel checks, flood-related disruptions this year shall led to a 2-3mmscmd loss. These volumes are likely to recover in FY27.
* Lastly, the ramp-up in gas offtake has been slow across IOCL’s refineries in Paradip, Haldia, Barauni, and Guwahati. With improving connectivity and new IOCL refinery capacities coming onstream, transmission throughput and utilization are expected to strengthen in FY27
Transmission and petchem expansion on track for FY26 commissioning
* GAIL’s petrochemical expansion remains on track, with 1,250ktpa PTA project targeted for completion by Feb’26. The 500ktpa PDH-PP unit is slated for mechanical completion by Jun’26, with production likely commencing by Dec’26. We are building in for petchem volumes to rise 25% over FY25-28, thus boosting profitability.
* At the Pata complex, GAIL continues to supply feedstock under Henry Hub-linked contracts, though it retains flexibility to switch to crude-linked pricing as needed. The company does not anticipate any major shutdowns in the near term, ensuring stable operations until new capacities come onstream.
Capex stabilizing as mega projects end; new cycle shaping up
* Capex is expected to remain largely flat in the near term, given the absence of major new project announcements. However, GAIL’s board has approved several key pipeline and expansion projects, with a total investment of INR75b.
* These include the Jamnagar–Loni pipeline expansion (INR55b), the Vijaipur–Bina line (INR5.5b), and the Dahej–Uran–Dabhol pipeline (INR15b), which will support the expansion of the Dabhol LNG terminal capacity to 6.5mmtpa. Additionally, the 1.5mmtpa Dabhol expansion project itself entails an investment of about INR5.5b.
* On the renewable and green energy front, GAIL has also approved two new compressed biogas plants, each with an estimated capex of around INR1b, underscoring its gradual diversification into cleaner energy initiatives.
Dabhol ramp-up to enhance earnings contribution
* The Dabhol terminal is set to complete its heating system by Jun’27. This will allow its capacity utilization to rise from ~40% to ~60%.
* Further, GAIL is planning to expand the Dabhol capacity by 1.5mmtpa, which will take around two years, with long-term plans to scale the terminal capacity to 15mmtpa. In FY25, Dabhol generated a adj. EBITDA of ~INR2b, forming a modest ~1.5% share of GAIL’s consolidated EBITDA; however, its contribution is expected to rise meaningfully in the coming years.
Key risks: APM de-allocation in the LPG segment
* GAIL’s LPG production segment has been witnessing APM gas de-allocation in recent quarters, and further de-allocation remains a risk for profitability.
* About 25% of the domestic gas originally allocated to this division has been withdrawn, resulting in a corresponding decline in the average production run- rate of LPG and liquid hydrocarbons (LHC). Any additional de-allocation could further weigh on segment performance and profitability.
* In FY25, the LPG and LHC segment EBIT accounted for 6.5% of GAIL EBIT. Producing LPG using costlier RLNG is economically unviable, thus limiting flexibility.
Valuation and View
* We reiterate BUY on GAIL with our SoTP-based TP of INR205. Over FY26-28, we estimate a 9% 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 INR138.5b over FY26-28, which we believe can support its valuations.
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