homemarket NewsGAIL's recent surge driven by optimism not fundamentals, says Kotak Institutional Equities
GAIL's recent surge driven by optimism not fundamentals, says Kotak Institutional Equities
The company's petchem business has been reporting losses for the last five quarters and although the feedstock costs may fall in the second half of the current financial year, a return to profitability looks difficult, according to Kotak Institutional Equities.
2023 turned out to be the best year for GAIL's shares since 2009 as the stock stepped on the gas, deliverying returns of nearly 70%.
However, Kotak Institutional Equities believes that the stock is running ahead of fundamentals due to optimism. As a result, the brokerage has downgraded the stock to "Sell" from the earlier rating of "reduce." However, it has marginally raised its price target on the stock to ₹125 from ₹120 earlier.
GAIL is realising a tariff of nearly 18% to 20% higher compared to that approved by the PNGRB for its INGPL network, which is a positive, according to the Kotak Note. However, the rally is driven by optimism due to firming up of oil prices, record high gas consumption in India and optimism with regards to the transmission business.
The company's petchem business has been reporting losses for the last five quarters and although the feedstock costs may fall in the second half of the current financial year, a return to profitability looks difficult, according to Kotak Institutional Equities. The brokerage expects the segment to see meaningful profits only in financial year 2026.
"For the LPG segment, profitability should return in the second half," Kotak said in its note, but warned that the losses may return in the first half of financial year 2025. "Despite the weak profitability, GAIL's further large capex in petchem has been a key worry," the note said.
The brokerage has further increased the transmission volume assumptions by another 1% to 3% to 128 and 134 mmscmd respectively for financial year 2025 - 2026. Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) estimates have also been raised by 1% and 2% despite a lower APM allocation and a 48% reduction in the KG basin pipeline tariff.
Interestingly, just last Friday, Motilal Oswal had chose GAIL as one of its top picks for 2024 with a price target of ₹195.
Despite GAIL's capital expenditure growing by 64% over financial year 2024 - 2026, Motilal Oswal expects the company to report free cash flow of ₹4,560 crore in financial year 2026.
Shares of GAIL are trading 3.2% lower at ₹160.95.
(Edited by : Hormaz Fatakia)
First Published: Jan 2, 2024 11:18 AM IST
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