Buy GAIL Ltd for the Target Rs.206 by Motilal Oswal Financial Services Ltd
Gas trading gains underpin earnings beat
* In 1QFY27, GAIL’s standalone EBITDA came in 86% above our estimate at INR63.8b. The beat in results was largely attributed to strong performance in natural gas trading and LPG & liquid HC segments. GAIL’s 1QFY27 gas transmission EBIT came in line with our estimate, while EBIT from the Marketing segment and LPG & Liquid hydrocarbon segments came in at 3.2x/4.4x of our est. The operating loss of the petchem segment came in 62% below our est. at INR1.2b. Reported PAT stood significantly above our estimate at INR42.9b (est.: INR20.7b), as other income came above our estimates.
* Things we liked about the result:
1) Pata was operating at 50% from midMay’26 (closed till then in 1Q). Now, it is operating at 100% utilization, and management expects breakeven in FY27.
2) Natural gas transmission was strong at 122mmscmd in 1QFY27, beating our estimates by 4%. Further, management has upgraded FY27 transmission volume guidance to 123mmscmd (vs. 119mmscmd earlier).
3) Cross-index sale enabled GAIL to achieve 77% of its FY27 gas trading guided EBIT in 1QFY27 itself.
* Key investor concerns:
1) Petchem and LPG realizations have declined since 1QFY27, which could result in lower segmental profitability QoQ.
2) Despite achieving 77% of its FY27 gas trading EBIT guidance in 1Q, management has maintained FY27 guidance of INR45b+, citing persistent geopolitical uncertainty. Further,
a) lower Henry Hub-linked gas availability for gas trading as the Pata plant returns to 100% utilization
b) the gradual reversal of the GCC-to-Brent pricing swap benefit shall weigh on gas marketing profitability.
3) A potential increase in System Use Gas pricing could impact profitability of the gas transmission segment.
* Key monitorables:
1) KKBPL Phase II, Gurdaspur–Jammu, and C2/C3 pipelines completion.
2) The 1.25mmtpa PTA plant at GMPL is in the advanced stage of commissioning and is expected to commence production shortly, while the 500 ktpa PDH/PP project is slated for commissioning in FY28.
3) 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 INR206.
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