Buy In 2024: CPSE Stock GAIL May See 20% Surge In Near Term, Re-Rating On Cards Due To Better ROE, FCF

Leading CPSE stock, GAIL (India) is in a sweet spot for re-rating by brokerages due to its sharp improvement in ROE and FCF. Also, the onset of new projects and strong prospects of core earnings adds to the positive sentiment in GAIL. Brokerages like Motilal Oswal, HDFC Securities, and Stock Edge have given an optimistic outlook on the company. GAIL is a leading natural gas producer backed by the government and also currently among the affordable PSU stocks to hedge hefty gains ahead.

On the last day of 2023, aka December 29th, GAIL's share price touched a new 52-week high of Rs 164.25 apiece before ending at Rs 162.05 apiece, up by 3.15% on BSE with a market cap of Rs 1,06,549.49 crore.

In 2023 alone, GAIL shares have surpassed returns of Sensex and Nifty, by surging nearly 68%.

Here's what brokerages say about GAIL's share price and its outlook:

Motilal Oswal:

The brokerage's note said, "Fueled by rising transmission volumes and a turnaround in petrochemicals, we are forecasting GAIL's ROE to improve to ~15% by FY26 from a low of 9.5% in FY23. A combination of the upcoming gas price-related tariff hikes, an EBITDA CAGR of 32% over FY23-26E, and the onset of new projects can drive a re-rating in our opinion."

Further, it highlighted that despite capex mounting 64% over FY24-26E (vs. avg. for FY19-23), they estimate that the company will report a free cash flow of INR45.6b in FY26. Further, we highlight optionality from GAIL Gas, which can provide value unlocking up to INR14.3/share for the parent (GAIL).

"We value the core business at 12x Dec'25E adjusted EPS of INR13.7, as we roll forward our valuations to Dec'25. Adding the value of listed and unlisted investments of INR30, we arrive at our revised TP of INR195. Our TP implies an FY26E P/B of 1.6x. The stock is currently trading at an FY26E P/B of 1.3x. Reiterate BUY," Motilal's note added.

Stock Edge:

This brokerage said that the sales volume of Gail Gas is expected to increase by ~10% per annum over the next three years. It would incur a capex of Rs 4,000 cr in the next three years. In the next two years, GAIL targets to add over 100 new CNG stations and ~2,00,000 new PNG connections.

To strengthen and increase natural gas transmission network to ~20,000 km, the company is also executing other important pipeline projects which include Mumbai-Nagpur-Jharsuguda Pipeline (1,755 km), Srikakulam Angul Pipeline (744 km), part of Kochi-Koottanad-Bangalore Mangalore Pipeline (KKBMPL) (~294 km) remaining in the State of Tamil Nadu, Dhamra-Haldia Pipeline (253 km) & Haridwar-Rishikesh-Dehradun Pipeline (50 km). These projects are at various stages of project execution.

GAIL also expects the gas transmission volume to grow by 6%-7% from the current level of 116 MMSCMD to ~120 MMSCMD in FY24. It anticipates further increase to ~132-133 MMSCMD in FY25. The growth would be primarily driven by fertilizer plants, refineries and city gas distribution (CGD) entities.

Moreover, GAIL is exploring possibilities for expanding its footprint in the renewable energy sector.

HDFC Securities:

Recommending to Buy GAIL for 2024, HDFC Securities said, "GAIL's prospects continue to strengthen and could drive a sustained period of outperformance over the next 2-3 years. Its leadership position in the natural gas transmission business, cost-effective operations, experienced management, decent dividend yield, attractive valuations and sound financials are key advantages offered by the stock."

With clear visibility on the offtake of a majority of pipelines and a growing market available for petrochemical expansion, growth avenues look robust for GAIL over the next 5-7 years.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.