1:2 Bonus Issue: BUY Maharatna PSU Oil & Gas Stock If Natural Gas Is Under GST? Jefferies On GAIL

Maharatna PSU oil and gas company, GAIL (India) is in focus with reports stating that the government is likely to review the talks of including natural gas under the GST regime. The inclusion of natural gas could aid faster adoption and support GAIL's trading volumes in the medium term, as per Jefferies. While the short-term target in GAIL is Rs 222 by Axis Securities with a time frame of 5-15 days. However, Jefferies has trimmed its target price on this PSU stock.

GAIL's share price is currently at Rs 219.75 apiece with a market cap of Rs 1,44,487.81 crore. The stock is nearing its 52-week high of Rs 233 apiece, while it has more than doubled from its 52-week low of Rs 103.20 apiece. In a year, GAIL has given 2x returns or 105% gains.

This natural gas producer is among the leading PSU stocks that pay hefty dividends. As per Trendlyne data, GAIL has paid up to 47 dividends since September 2001.

Additionally, GAIL also holds a long track record of rewarding bonus shares. The first time, GAIL turned ex-bonus was on October 6, 2008, for its bonus issue in the ratio of 1:2. After nearly a decade, GAIL rewarded two back-to-back bonus shares of 1:3 each in March 2017 and March 2018. Later on, the company also paid bonus shares in the ratio of 1:1 in July 2019. The latest bonus issue is of 1:2 which was in September 2022.

Short Term Target In GAIL:

Axis Securities suggest BUY in GAIL shares for a target of Rs 222 with a stop loss of Rs 207 apiece. The entry price in GAIL is recommended at Rs 212.

Meanwhile, highlighting about government's reviving talks to include NG under GST, Jefferies said that among g the 4 key states that could hold sway, 3 are under the ruling NDA. Inclusion could lower NG cost by US$ 0.8-0.9/mmbtu, aiding faster adoption and helping GAIL's TX and
trading vol in the medium term.

Jefferies believes GAIL's consol EBITDA could rise ~2% assuming it retains the benefit in the LPG segment. GUJGA's competitiveness to propane would improve by 6%, aiding vol or margin. PLNG could see higher LNG dd.

Further, the global brokerage highlighted that the improved competitiveness of NG should drive faster adoption and aid transmission and trading volume
growth over the medium term for GAIL. Also, the company expects the LPG and transmission businesses to benefit, but it is likely to pass on some of the benefits to its consumers.

Moreover, Jefferies mentioned that the tariff charged in its transmission business is already under GST. But the VAT on NG used as fuel is stranded. This VAT (c.Rs 0.8bn in FY24 calc) could be offset, but the company expects the regulator to cut tariffs to pass on the benefit to the consumer. VAT paid on NG purchased from third parties in the trading business is offset against VAT charged on NG sales, resulting in no stranding of taxes paid. In the petrochemical business, no VAT is payable on LNG used as input, as it is treated as GAIL's gas given the importing entity is GAIL. So, there is no stranding of taxes.

In the LPG business, Jefferies note said, VAT paid on NG as input (c.Rs 3bn in FY24 calculated) is stranded today,
as the final product is under GST. Inclusion would benefit GAIL whose consol Ebitda can see ~2% upgrade, unless the government forces it to pass on the benefit to the OMCs.

However, on the valuation, Jefferies said, "We have a Rs 167 PT on a SOTP basis. Risks: Higher crude or polymer prices, volatility in trading profits and any upward revision to transmission tariffs."

GAIL is a pioneer in city gas distribution (CGD) business in India. It has a presence in 67 Geographical Areas across India. GAIL has 8 JVs and three subsidiaries in India for its CGD business. Further, GAIL has an overseas presence in the USA, Singapore, Myanmar, China, and Egypt.

FY24 Revenue from Operations stood at Rs 1,33,500 crore in FY24 as against Rs 1,45,875 crore during FY23. PBT in FY24 stood at Rs 12,595 crore (up by 74%) as against Rs 7,256 crore in FY23. PAT (excluding Non-controlling interest) was Rs 9,899 crore in FY24 (up by 76%) as against Rs 5,616 crore in FY23.

Disclaimer:

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