1:2 Bonus Issue: HOLD Maharatna PSU Oil & Gas Stock GAIL For Rs 239 Target, 13% Potential Upside

Maharatna PSU oil and gas company, GAIL (India) is recommended to HOLD for a target price of Rs 239, hinting at a 13% potential upside ahead. In the trading week that ended on September 20, GAIL shares have corrected significantly by 3.4%, while its monthly drop is over 10%. Brokerage Nirmal Bang has trimmed its estimates on GAIL due to muted risk/reward as the more than 75.9% rally YoY in the stock has priced in the visible catalyst. GAIL recently issued bonus issues to its investors, while its YTD gains is about 28%.

Currently, GAIL's share price is at Rs 212.35 apiece, up by 0.62% on BSE with a market cap of Rs 1,39,622.24 crore. The stock's price-to-equity ratio is at 13.76x, while the return on equity is at 15.81%.

Among the positives for GAIL, the brokerage expects healthy growth in Gas Transmission and Gas Trading volumes. GAIL expects compensation for the higher cost of LNG used in gas the transmission segment in FY23. Also the start of - Mum-Nagpur -Jharsuguda and Srikakulam Angul - pipelines in 2HFY25./early FY26 could offer long term growth in gas transmission segment earnings and valuation.

Also, Nirmal added, policy enablers, gas demand CAGR of 6% and visibility in gas availability/lower gas costs are added catalysts. LNG liquefaction capacity addition is likely to cap LNG prices, unless there is a dramatic recovery in China - which could boost LNG demand.

However, in case of concerns, Nirmal Bang said, "Potential volatility in gas cost/supplies and uncertain pricing/margin outlook in Petchem/LPG&HC. Also, Gas Marketing looks to have hit an interim peak post the surge in FY24 and 1QFY25. This segment could face some pressure as crude is likely to head lower due to global headwinds for oil demand and benign supplies. The stock has also rallied 35% YTD and more than 70% YoY."

Accordingly, Nirmal Bang added, "we have cut our FY25E/FY26E gas marketing EBITDA by 25.2%/34.7%, and our FY25E/FY26E by 14.8%/12%. US$70/bbl crude is positive for GAIL; US$55-60/bbl is negative."

While the brokerage has added FY27E and rolled over to Sep'26E. Notably, it said, "We have trimmed our crude forecast by 4.8%/5% in 2QFY25/3QFY25 to US$78/US$73.5 per bbl due to the weakness in the global oil market. We have cut our FY25E Brent crude forecast by 2.8% to US$77.4/bbl, and left our FY26E unchanged at US$65/bbl, while our FY27E crude forecast is at US$62.2bbl."

On the valuation, Nirmal added, "We maintain HOLD on GAIL due to muted risk/reward as the more than 75.9% rally YoY in the stock has priced in visible catalysts, barring a quicker ramp upc to visible earnings from the petchem projects underway (given the current pain in global petchem margins)."

Hence, Nirmal Bang has trimmed target price on GAIL to Rs 239 per share.

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. GAIL is also among the highest bonus issue distributors to its investors.

The company has 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.