GAIL (India) shares sink 5% on Kotak downgrade; says run-up driven by optimism, not fundamentals

GAIL (India) shares sank 5 percent intraday on January 2 as Kotak Institutional Equities downgraded the stock of the natural gas company on a negative outlook for gas demand and concerns on fundamentals versus the optimism in the scrip.

The stock’s recent run up has been extremely strong, with GAIL (India) shares jumping more than 50 percent over the past six months. The strong run is driven by optimism, less on fundamentals, said Kotak.

As of 12:10 pm, shares of GAIL (India) were quoting Rs 162.25 on the NSE, lower by 2.38 percent compared to the closing price of the previous session.

After the recent surge, Kotak downgraded the rating on the counter, but raised its fair value price to Rs 125 apiece, from Rs 120. From the CMP, this comes as a 29.8 percent discount.

A few months ago, when oil prices firmed, the stock was seen as a proxy to higher oil prices. However, it has not corrected with the fall in oil prices. Instead, the stock has been even stronger due to the optimism of higher transmission volumes.

Recently, India’s gas consumption has been at record highs and there is optimism about the transmission business now. Despite the strong gas consumption data, over the medium-term, the demand for gas is weak and over the long-term, it is even weaker, noted Kotak.

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“Although a higher volume is positive, we note that GAIL is completing several new pipelines, with investments of over Rs 30,000 crore FY2024-25E. Driven by the integrated network tariff rise, higher realization versus approved tariff and strong volume, post-tax RoCEs will recover from <4 percent in FY2023 to ~8 percent in FY2024,” said Kotak.

In the petchem segment, GAIL reported an EBIT loss for the past five quarters. For the second half of FY24, the domestic PE prices are down by around 4 to 5 percent. For the LPG segment, profitability should return in H2FY24.

“At the APM price, GAIL’s breakeven LPG price is ~Rs 43-44/kg and losses can return during the summers (H1FY25). Despite weak profitability, GAIL’s further large capex in petchem has been a key worry,” said Kotak.

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