Shares of GAIL (India) Ltd. hit an all-time high on Monday after it received a price target boost from Morgan Stanley, which expects the company's market capital to double by 2026 as its significance in India's energy transition grows.
Morgan Stanley expects shares of the state-run entity to hit Rs 254, a potential upside of 33% from Friday's close. The price target is the highest on the company so far among the analysts tracked by Bloomberg. The research firm maintained 'overweight' on the stock.
The company is in a "sweet spot", with $7 billion invested in pipeline infrastructure in the past decade and $1 billion in chemicals to profit from India's new growth norm in energy and infrastructure demand, the research firm noted in an April 7 note.
"We see Ebitda doubling and a 13% earnings CAGR in the next three years. Seven stars across divisions are well aligned," the research firm said.
"We expect GAIL's ROCE to reach upwards of 13% from FY25 after remaining below 10% in the past three years," the note said.
Potential Upside Surprises
Morgan Stanley sees the potential for upside surprises in five areas for GAIL in the coming year, which could drive 20–25% upside to Street F25–F27 earnings estimates.
Gas demand: greater power and industrial demand as gas prices are more affordable vs. oil.
Chemical margins come from higher PE prices and lower gas costs. 3. Tariff hikes on pipelines—to recover past higher gas costs.
Stability in gas marketing profitability, and
Dividends: state-owned enterprises are focusing more on capital returns.
Why GAIL Is Morgan Stanley's Top Pick
GAIL's earnings leverage to affordable gas and its position as a pipeline player to benefit from India's gas adoption story (which is in the early stages of evolution) stand out vs. most of its Asian peers.
Its investment cycle is slowing and largely being de-risked as well.
It also benefits from chemical cycle recovery.
When compared to other gas utilities globally, India also has lower exposure to long-term oil-linked LNG contracts (at about 50% vs. Japan at 80%). "This also positions India and GAIL to benefit most from cheaper global LNG prices, in our view," it said.
Key Risks
"A bigger increase in gas demand than we anticipate as global power demand rises for AI/GenAI," Morgan Stanley said. This could slow down the deflation in LNG prices and eventually lead to a slower pickup in India's gas demand.
GAIL's overinvestments in chemicals restrain its margins, and with limited integration in its polyester vertical, it struggles to increase returns.
Oil-linked LNG contracts lead to losses as spot LNG prices decline.
GAIL's stock rose as much as 3.07% during the day to Rs 196.60 apiece on the NSE. It was trading 2.83% higher at Rs 196.15 per share, compared to a 0.44% advance in the benchmark Nifty 50 at 9:41 a.m.
Twenty out of the 35 analysts tracking the company have a 'buy' rating on the stock, eight recommend 'hold' and seven suggest 'sell', according to Bloomberg data. The average of 12-month analyst price targets implies a potential downside of 5.5%.
RECOMMENDED FOR YOU
GAIL Q2 Results Review: Brokerages Divided As Business Outlook Improves But Valuation Remains Concern
Nov 07, 2024
Diwali 2024: Gold Prices Hit Rs 79,970, Hovering Around Record High
Oct 31, 2024
HCLTech Share Price Hits Record High After Raising FY25 Revenue Guidance
Oct 15, 2024
Torrent Power Share Price Hits Record High After 2,000-MW Energy Storage Order Win
Oct 09, 2024
POPULAR