Foreign brokerage UBS has given a double upgrade to state-run GAIL (India) Ltd from 'Sell' to 'Buy', doubling its target price to ₹150 from ₹80 earlier.
Reacting to the upgrade, shares of GAIL hit a 52-week high of ₹122.95 apiece on the National Stock Exchange (NSE).
Higher earnings contribution from the more stable transmission business indicates the nature of the business is becoming more structural rather than cyclical, the brokerage says in its note.
A return on the utility nature of the business could lead to a re-rating of the stock, it says.
UBS believes consensus is yet to fully appreciate the upside to realised tariffs from tariff integration, as well as the scope of India's improving gas demand and GAIL's pipeline expansion.
"We forecast an 8% volume CAGR over FY23- 26. We believe these could trigger a series of margin-led consensus earnings upgrades. Our FY24-26E standalone EBITDA is 21-29% ahead of consensus," the brokerage notes.
GAIL is trading at 24% to 50% discounts to its 10-year average price-to-book value and price-to-earnings, respectively, and a deep discount in investment value, making its risk-reward favourable, it says.
Taking a cue from unified tariffs and zonal revenue entitlement as proposed by the regulator, GAIL’s FY24-26E transmission revenue could be 11-19% higher than consensus, driven by 6-13% higher realised tariffs, says UBS.
There is scope for further upward revision in tariffs in the coming months as the regulator had considered lower gas prices in the previous tariff order, it says.
The cost of gas used as fuel for transmission has materially declined in FY24 year-to-date, thereby improving margins, says the foreign brokerage. "We forecast a 42% CAGR in transmission EBITDA over FY23-26," he adds.
India's gas demand could grow from 165 million metric standard cubic meters per day (mmscmd) in FY23 to 200mmscmd by FY26, given improved domestic gas supply, ramp up in utilisation of new or upcoming LNG terminals as well as lower LNG prices improving affordability, according to UBS.
GAIL's pipeline expansion could enable an 8% volume CAGR in GAIL's natural gas transmission and trading volumes over FY23-26, the brokerage predicts.
UBS says GAIL's transmission volumes have been broadly flat over FY19-23 due to availability and affordability issues – delays in pipeline commissioning, LNG sourcing issues, and high gas prices.
GAIL's major pipelines are being commissioned over 2023-24, which would provide connectivity to multiple city gas, industries, refineries, fertilisers, boosting its gas transmission volumes. Higher gas demand in India would enable GAIL to place its entire LNG portfolio in India as opposed to the international sales in the past which impacted profitability, the brokerage explains. UBS expects GAIL's natural gas trading business to contribute a stable ₹3,700-4,000 crore over FY23-26.
The gas utility is going to announce its June quarter earnings today.
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