GAIL Q2 Results Review: Brokerages Divided As Business Outlook Improves But Valuation Remains Concern

Brokerages are divided on the share price of GAIL (India) Ltd. after the company reported its September quarter results. Emkay Research has upgraded its rating to 'buy' from 'add' earlier, citing recent correction while Nuvama retained its 'reduce' on valuation concerns.

At the same time, the stock remains a top pick in the sector for Citi Research, which also has an open positive catalyst watch. "We raise our FY25-27 earnings per share estimates by 5-8%, following first half performance, with our TP (target price) at Rs 280 vs. Rs 290 earlier as we mark-to-market value of investments," Citi said.

Since August, the stock has lost nearly 13%. While Emkay Research sees this correction as a positive, Nuvama said that its recent downgrade on the stock to 'reduce' was culminating.

"We reckon further volatility as valuations are still unsupportive and higher earnings of its historically volatile gas marketing business could normalise soon," said Nuvama, which has also reduced its target price for the stock by 8% to Rs 196, implying 6.18% downside.

According to Citi Research, GAIL's earnings have bottomed out and the outlook across its four key business segments has improved. It noted that a combination of the Russian contracted LNG supply disruption, volatility in spot LNG prices, high compressor fuel costs, and rising domestic APM gas prices had adversely impacted GAIL in FY23.

"The gas transmission business should benefit from higher volumes, higher tariffs, and lower fuel costs," Citi said.

The gas trading business should see reduced volatility going ahead, with a large portion of US contracted supplies tied up on a back-to-back basis. The LPG business should benefit from stable APM gas prices, and the petrochemicals business should benefit from LNG feedstock flexibility and improved utilisations, it said.

The company's net profit fell 16% sequentially to Rs 2,690 crore in the quarter ended Sept. 30, 2024, according to an exchange filing on Tuesday. That compares with Rs 2,616-crore consensus analysts' estimate tracked by Bloomberg.

Nuvama said it had downgraded the stock after first quarter earnings, primarily due to lofty valuations and unsustainable elevated earnings from its natural gas marketing business, which made up 40% of second quarter Ebitda.

"Despite the stock correcting by 15% since 1st Aug’24, valuations are still 1SD (standard deviation) above long-term average on a 1Y blended forward EV/EBITDA basis," it noted.

The brokerage expects marketing margins to normalise from current elevated levels. This is due to likely volatility in its NG marketing earnings due to spreads contracting between regional spot LNG and Henry Hub contracting on high global LNG supply additions. There is also Brent-linked contracted LNG and Henry Hub-linked contracted LNG on lower global crude demand growth in the wake of fuel substitution and elevated OPEC+ spare capacity, according to Nuvama.

Emkay sees a likely rise in marketing margin guidance of more than Rs 45 billion post third-quarter results. It also expects Petchem business to see reasonable profits with healthy utilisation. But, the brokerage has cut its FY25 EPS by 10% to factor in the delay in pipeline tariff hike to FY26.

It has also trimmed FY26-27E EPS by 6% each on lower marketing income, petchem deltas, and LPG-LHC realisation, due to a cut in our Brent assumption to $80/bbl from $85. The brokerage has lowered its target by 5% to Rs 255, implying 22% upside.