Motilal Oswal has given Buy recommendation for GAIL recommended buy rating on the stock with a target price of Rs 200 in its research re with a target price of Rs. 200 in its research report issued on Oct 30, 2021
Motilal Oswal’s research report on GAIL
GAIL reported a 52% beat on our EBITDA estimate, driven by a multi quarter high profitability in the Gas Trading business. Operating performance of other business segments, especially petchem, improved on a YoY and QoQ basis (despite the weakening of petchem margins globally QoQ). -Management guided that the Gas Trading segment may do even better in 3QFY22 as spot LNG prices increase further (+USD10/mmbtu in 3QFY22 till date). Also, lesser cargoes are now being sold outside India (eight cargoes in 2Q v/s 14 in 1QFY22) on the back of improved demand from the pre-commissioning and ramp-up of fertilizer plants in India. It remains confident on bringing all cargoes to India over the next one year as Sindri, Barauni, and Gorakhpur fertilizer plants get commissioned. -The petchem plant is currently operating at more than 100% utilization. GAIL will achieve 100% utilization in FY22, despite a low utilization in 1Q. With the recent improvement in petchem margin, we expect better performance from this segment as well in 3QFY22. Gas transmission volumes rose to 114mmscmd on the back of an increase in volumes from CNG and Industrial PNG segment. The management expects the same to touch 120mmscmd in FY23. LPG and Liquid HC realization would see a huge jump in 3QFY22 as LPG prices lag Brent prices (+USD10/bbl in 3QFY22 till date) by a month. In light of commodity prices turning favorable again for the company and the reality of de-risking US Henry Hub contracts coming to light, we reiterate GAIL as our top pick in the large-cap space.
The stock trades at a discount of ~25% to its one-year forward long-term P/E average. We haven’t ascribed any valuation so far to GAIL Gas (current volumes at 5.5mmscmd). If the pickup in volume commences in CGDs, especially Bengaluru, then it may result in additional value. Valuing the core business at 10x Dec’23E adjusted EPS of INR15.6 and adding investments, we arrive at a TP of INR200/share. The biggest risk to our call is a sharp decline in oil price before Fertilizer companies commence operations, which may usher uncertainty in the Trading segment.