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Updated December 29th, 2023 at 11:56 IST

GAIL set for re-rating on improving ROE, cash flows

The projections indicate a rise in ROE from 9.5 per cent in FY23 to approximately 15 per cent by FY26.

Tanmay Tiwary
GAIL
GAIL | Image:GAIL
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State-owned natural gas processing and distribution company GAIL is poised for a crucial re-rating driven by a robust improvement in return on equity (ROE) and free cash flow (FCF).

The projections indicate a rise in ROE from 9.5 per cent in FY23 to approximately 15 per cent by FY26, fuelled by increased transmission volumes and a turnaround in the petrochemical segment, according to the brokerage firm Motilal Oswal.

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Anticipated factors contributing to the re-rating include upcoming gas price-related tariff hikes, an impressive EBITDA Compound Annual Growth Rate (CAGR) of 32 per cent from FY23 to FY26, and the commencement of new projects.

“Despite capex mounting 64 per cent over FY24-26E (versus average for FY19-23), we estimate that the company will report a free cash flow of Rs 456 crore in FY26,” said Motilal Oswal in a note.

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The brokerage firm stressed upon the potential value unlocking from GAIL Gas, offering up to Rs 14.3 per share for the parent company. Valuing the core business at 12 times the adjusted earnings per share (EPS) of Rs 13.7 by December 2025, along with the inclusion of listed and unlisted investments totalling Rs 30, results in a revised target price (TP) of Rs 195. This implies a Price-to-Book (P/B) ratio of 1.6 times based on FY26 estimates, with the stock currently trading at 1.3 times FY26 estimate P/B.

Earnings visibility is expected to improve as transmission contribution grows, with estimates projecting transmission volumes reaching 140 million metric standard cubic meters per day (mmscmd) and a 9 per cent CAGR from FY23 to FY26, the brokerage added. This growth is, however, attributed to increased domestic gas output from key players and the expansion of LNG regasification capacity, supported by new LNG terminals.

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The petrochemical segment is anticipated to turn profitable at the EBIT level by FY26, driven by factors such as the peak in polyethylene (PE) prices in CY23, rising global demand amid low inventories, and favourable spot LNG prices. 

The start-up of a new 500 thousand metric tons per annum (ktpa) PDH-PP plant at Usar in FY26 is expected to contribute positively to standalone EBITDA, Motilal Oswal asserted.

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Motilal Oswal has a ‘buy’ rating on GAIL, with an upgraded target price of Rs 195, reflecting optimistic projections for FY26. 

As of 11:48 am, shares of GAIL were trading 3.37 per cent higher at Rs 162.40 per share.

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Published December 29th, 2023 at 11:55 IST

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