Motilal Oswal Reaffirms BUY on GAIL with ₹265 Target Driven by Growth Catalysts and Strong Financial Outlook

Motilal Oswal has reiterated a BUY recommendation for GAIL (India) following its Q2 FY25 results, which came in line with the brokerage’s expectations. GAIL reported stable transmission EBITDA and a return to profitability in its petchem business during the quarter. Motilal Oswal believes that GAIL has the potential for a 10% tariff hike in its transmission business, which could provide additional growth in the next fiscal year. The brokerage also expects transmission volumes to be a key growth driver in FY26-27.

As of November 8, 2024, GAIL’s share price ended at ₹204.15, marking a 3% decline for the day, with a market capitalization of ₹1.34 lakh crore. Despite the drop on Friday, the stock gained nearly 3.5% during the week and is up about 23% YTD. The stock’s 52-week high is ₹246.35, while its 52-week low stands at ₹122.90.

Motilal Oswal sees three key catalysts for GAIL’s performance over the next 2-3 years:

1. 10% tariff hike for the transmission business in 4Q FY25.
2. Moderate but sustained growth in transmission and marketing volumes in FY26-27, with upside potential if spot prices decline significantly.
3. The petchem business is expected to benefit from more than doubling its capacity by FY27, which should drive further profitability.

Motilal Oswal estimates a 14% CAGR in PAT from FY24 to FY27, driven by:

• Increased natural gas transmission volumes, forecasted to reach 149 MMSCMD in FY27, up from 120 MMSCMD in FY24.
• A significant improvement in the petchem segment as new capacity comes online and spreads improve in 2H FY25 to FY27.
• A healthy EBIT of at least ₹45 billion from the trading segment.

Motilal also expects GAIL’s RoE to rise to around 16% by FY26, compared to 9.5% in FY23, with free cash flow (FCF) projected to reach ₹73 billion in FY26, a sharp improvement from a negative ₹45.3 billion in FY23. This robust FCF generation is expected to support a higher valuation for GAIL.

The brokerage has set a target price of ₹265 for GAIL, which could mark a new record high for the stock.

In terms of corporate actions, GAIL is known for its generous dividends and bonus issues. It has paid 47 dividends since 2001 and has a history of rewarding its investors with bonus shares. The most recent bonus issue was 1:2 in September 2022.

Disclaimer: The content provided is for informational purposes only and should not be construed as financial advice. Investment decisions should be made based on individual research, risk tolerance, and with the guidance of a professional advisor. Past performance is not indicative of future results.