GAIL slumps as analysts say price hike largely factored in

Emkay Global Financial Services said GAIL is favourably placed, though the recent stock outperformance prices in most positives, as it downgraded its rating on the stock to ‘hold’ from ‘buy’.

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The shares of GAIL India slumped three percent in the early trade on March 23, as analysts said most positives arising out of a tariff hike had been factored in the stock price.

On March 22, the Petroleum and Natural Gas Regulatory Board announced new tariffs. The new tariff for the Integrated Natural Gas Pipeline of GAIL will be Rs 58.61 per metric million British thermal unit (MMBtu), which is 45 percent higher than the current rate. The change comes into effect on April 1, 2023.

Emkay Global Financial Services said GAIL is favourably placed, though the recent stock outperformance prices in most positives. The brokerage firm downgraded its rating on the stock to “hold” from “buy”.

GAIL‘s scrip has gained 15 percent in the last three months and in the last three years, it has rallied over 100 percent.

Following the hike, JP Morgan increased its EPS estimate for FY24-25 by 11-16 percent, while Motilal Oswal Financial Services raised EBITDA estimates for FY24 to Rs 134 billion from Rs 116 billion. Similarly, the domestic brokerage firm has also raised its FY24 EPS estimate by 16 percent to Rs 14.4 from Rs 12.4.

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Mixed bag 

Even as the tariff hike and lower spot LNG prices are a positive, JP Morgan believes earnings of GAIL would remain volatile. It expects the company’s earnings to improve sharply from December 2022, one of the weakest quarters.

Citi believes volatility in gas trading has reduced and sees upsides from lower spot LNG and APM (Administrative Price Mechanism) prices in petchem and LPG respectively. It sees volume recovery and steady growth in gas transmission.

Jefferies also sees a 17 percent EBITDA hike in FY24 estimate, with part of the benefit offset by higher operating costs.

It, however, cautioned, “While future tariff calculations may incorporate higher fuel costs, this will drag near-term earnings. An increase in tariff would also negatively impact the profitability of LPG production and petchem segments”.

According to Morgan Stanley, the recent development implies Rs 2,000 crore in revenue along with a 14 percent and 12 percent upside to FY24 and FY25 EPS estimates.

At 12.24 pm, the stock was trading at Rs 105.15 on the National Stock Exchange, paring losses to 0.24 percent.

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