PSU MahaRatna Stock Hits New 52-Week High After UBS Double Upgrades To Buy From Sell; Seen To Rise 24%

Government-backed leading natural gas producer, GAIL (India) emerged among the favourites of investors during Monday's trading session. The stock skyrocketed as much as 4.51% on BSE to hit a new 52-week high. The strong upside can be attributed to the rating by the Switzerland-based multinational investment bank, UBS who double upgraded its outlook on GAIL to Buy from Sell. GAIL has a potential of nearly 24% upside ahead.

At the time of writing, GAIL (India) traded at Rs 121.75 apiece, up by Rs 4.20 or 3.6% on BSE. The stock jumped by at least 4.51% with a new 52-week high of Rs 122.85 apiece in the early deals.

In its research note, UBS said, "We double upgrade GAIL from Sell to Buy based on our bottom-up zonal revenue analysis of the company. We think the consensus is yet to fully appreciate the upside to realised tariffs (from tariff integration), as well as the scope of India's improving gas demand and GAIL's pipeline expansion (we forecast an 8% volume CAGR over FY23-26)."

UBS believes that these could trigger a series of margin-led consensus earnings upgrades.

"Our FY24-26E standalone EBITDA is 21-29% ahead of consensus. Further, higher earnings contribution from the more stable transmission business (52% of segment EBITDA in FY24-26 vs. 34% in FY22-23) indicates the business is becoming more structural rather than cyclical. A return of the utility nature of the business could lead to a re-rating of the stock, in our view," UBS' note added.

Further, UBS highlighted that taking a cue from unified tariffs and zonal revenue entitlement as proposed by the regulator, GAIL's FY24-26E transmission revenue could be 11-19% higher than consensus, driven by 6-13% higher realised tariffs. There is scope for a further upward revision in tariffs in the coming months (as the regulator had considered lower gas prices in the previous tariff order), which is not built in its base case.

Additionally, it said, "The cost of gas used as fuel for transmission has materially declined in FY24 YTD, thereby improving margins. We forecast a 42% CAGR in transmission EBITDA over FY23-26."

According to USB, GAIL is trading g at 24%/50% discounts to its 10-year average P/BV and PE, and a deep discount in investment value, making its risk/reward favourable.

Thereby, UBS' note said, "We double upgrade to Buy and raise our PT from Rs80 to Rs150."

From the current market price to UBS TP, GAIL has the potential to rise by nearly 24%.

GAIL is also trading higher as the stock is scheduled to deliver its June 2023 quarterly earnings for FY24 on July 31st.

Last week, GAIL released its annual report for FY23. Its Chairman & Managing Director, Sandeep Kumar Gupta said, "New business initiatives remain at the core of your Company's strategic outlook for enhancing the company's profitability and market reach."

Moreover, Gupta said, "The company is exploring opportunities of ethane sourcing for its existing petrochemical plant. Your Company has also issued an EoI to explore the opportunity of equity acquisition in an LNG liquefaction terminal along with 1 MMTPA LNG tie-up from the USA. Further, your company is also on the lookout for affordable long-term LNG contracts from other sources in addition to the existing LNG portfolio."

GAIL's 39th annual general meeting is scheduled for August 23.

Disclaimer

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