1:2 Bonus Issue: BUY Maharatna PSU Oil & Gas Stock GAIL For 16% Potential Gains, Target Rs 275 By Motilal

Brokerage Motilal Oswal has recommended BUY on PSU oil and gas giant, GAIL (India) after the company reported better-than-expected EBITDA and PAT in Q1FY25. As per the brokerage, transmission and marketing contributed to GAIL's earnings. In the trading week that ended on August 2nd, GAIL shares are broadly up by 2%. While year-to-date, the stock has rallied by over 42.5% on BSE.

GAIL's share price is currently near its 52-week high of Rs 246.35 apiece, while the stock has gained by 112.5% from its 52-week low of Rs 111.50 apiece.

Currently, GAIL's share price is at Rs 237 apiece with a market cap of Rs 1,55,829.86 crore. Its return on equity is at 15.81%.

On a Consolidated basis, GAIL's revenue from Operations stood at Rs 34,822 crore in Q1 FY-25 as against Rs 32,833 crore during Q4 FY-24. PBT in Q1 FY-25 stood at Rs 4,114 crore as against Rs 3,099 crore in Q4 FY-24. PAT (excluding Non-controlling interest) was Rs 3,183 crore in Q1 FY-25 as against Rs 2,469 crore in Q4 FY-24.

As per Motilal, GAIL anticipates robust domestic gas demand, projecting gas transmission volumes to reach 132/142/152mmscmd by the end of FY25/FY26/FY27. For the trading segment, the management guides EBIT of at least INR45b in FY25. For Petchem, the management is hopeful of healthy FY25 profitability.

Motilal highlighted key takeaways from the earnings call of GAIL. According to the brokerage, 1) recent increase in LPG tariffs will generate INR1.2-1.4b p.a. incremental PBT for GAIL; 2) Ex-Apr'24, polymer segment volumes stand at 105% utilization, in line with FY25 target volume; 3) expected completion of 5,465km of pipeline projects and 60ktpa Polypropylene plant at Pata in FY25.

Thereby, Motilal raised its FY25/FY26 earnings estimates by 16%/6% as we 1) increase trading EBIT to INR55b/INR53b in FY25/FY26 (from INR36b/INR47b earlier) after a strong 1Q performance, and 2) build in the impact of impending tariff hikes in LPG pipelines.

On the valuation, Motilal said, "We reiterate our BUY rating on GAIL with a TP of INR275. During FY24-26E, we estimate an 11% CAGR in PAT driven by: An increase in natural gas transmission volumes to 140mmscmd in FY26 from 120mmscmd in FY24; Substantial improvement in the petchem segment's profitability over 2HFY25- FY26 as new patches capacity will be operational and low inventories globally will drive re-stocking demand thus improving spreads; and Healthy trading segment profitability with expected EBIT of INR45b."

Also, the brokerage expects GAIL's ROE to improve to ~15% in FY26 from 9.5% in FY23 with healthy FCF generation of INR46b in FY26 (vs. -INR45.3b in FY23), which it believes can drive re-rating for the stock.

From 2022 to date, GAIL has delivered a 1:2 bonus issue and up to 95% dividend payout.

GAIL first turned ex-bonus in September 2022, for distributing 1 bonus share against two existing equities. While the stock has delivered two interim dividends since last year. It paid up to 40% or Rs 4 dividend per share for which it turned ex-dividend on March 21, 2023, which is followed by another dividend payout of Rs 5.50 per share or 50% for the ex-dividend date on February 6, 2024.

GAIL (India) Limited is India's leading natural gas company with diversified interests across the natural gas value chain of trading, transmission, LPG production & transmission, LNG re-gasification, petrochemicals, city gas, E&P, etc.