GAIL shares rally as UBS double upgrades stock, sets target at Rs 150

Shares of state-run GAIL jumped nearly 5 per cent in Monday's trade, as foreign brokerage UBS double-upgraded the stock to 'Buy' from 'Sell' while raising its target price on the stock to Rs 150 from Rs 80 earlier. UBS said GAIL shares are trading at a 50 per cent discount to historical averages and that the consensus is yet to fully appreciate the upside to realised tariffs, the scope of India's improving gas demand and GAIL's pipeline expansion. These factors, it said, could trigger a series of margin-led consensus earnings upgrades for the stock. The stock rose 4.50 per cent to hit a high of Rs 122.85. 

UBS said its FY24-26 standalone Ebitda estimate for UBS is 21-29 per cent, which is ahead of consensus. UBS said a higher

earnings contribution from the more stable transmission business (52 per cent of segment Ebitda in FY24-26 against 34 per cent in FY22-23) indicates the business is becoming more structural rather than cyclical.

"A return of the utility nature of the business could lead to a re-rating of the stock, in our view. GAIL is trading at 24 per cent/50 per cent discounts to its 10-year average P/BV and PE, and a deep discount in investment value, making its risk/reward favourable. We double upgrade to Buy and raise our price target from Rs 80 to Rs 150," UBS said.

Taking a cue from unified tariffs and zonal revenue entitlement as proposed by the regulator, UBS said GAIL's FY24-26E transmission revenue could be 11-19 per cent higher than consensus, driven by 6-13 per cent higher realised tariffs.

"There is scope of further upward revision in tariffs in the coming months (as the regulator had considered lower gas prices in the previous tariff order), which is not built in our base case. The cost of gas used as fuel for transmission has materially declined in FY24 YTD, thereby improving margins. We forecast a 42 per cent CAGR in transmission Ebitda over FY23-26. We expect India gas demand to grow from 165mmscmd in FY23 to 200mmscmd by FY26," UBS said.

The demand increase could be due to a steep ramp up in domestic gas supply (primarily from Reliance Industries

and ONGC); a ramp up in utilisation of new (Dhamra) and upcoming (Chhara, Jafrabad and Jaigarh) LNG terminals; and lower LNG prices improving affordability.

"GAIL’s major pipelines (Urja-Ganga, Barauni-Guwahati and KKBMPL, already at 70-100 per cent completion) should be commissioned over 2023-24 at an estimated cost of Rs 35,000 crore. The new pipelines would connect multiple city gas/ industries/ refineries/ fertilizers, boosting GAIL’s gas transmission and trading volumes," UBS said.

Also read: Maruti Suzuki Q1 results preview: 120-160% jump in profit likely; margins to expand

Also read: Hot stocks on July 31, 2023: Adani Green, Gland Pharma, IRFC, Maruti Suzuki and more