Stock To Buy: This Natural Gas Stock Can Give 43% Return: Guided Capex Of Rs. 75b: Motilal Oswal

Brokerage firm Motilal Oswal suggested investors buying the stocks of GAIL for a potential 43% short-term return. The company expects higher demand from the commissioning of fertilizer plants, ongoing refinery and petchem expansions, and the development of CGDs. It has also guided at a Capex of Rs. 75b in FY23.

Target Price, Current Market Price, And Market Capitalization

The Current Market Price (CMP) of GAIL is Rs. 144. Motilal Oswal has estimated a Target Price for the stock at Rs. 205. Stock is anticipated to give a 43% return, in 1 year. The company is a large-cap company with a market capitalization of Rs. 66,605 crore.

Stock Outlook
Current Market Price (CMP)	Rs. 144
Target Price	Rs. 205
Potential 1 year return	43.00%
52 week high share price	Rs. 173.50
52 week low share price	Rs. 125.20

GAIL has reported a well-performed quarter in 4QFY22. Its operating performance for transmission and petrochemicals decreased on a YoY basis. The management guided at a 5-6mmscmd increase in gas trading volumes in FY23. Additionally, in FY 22, EBITDA stood at Rs. 138B, up 115% YoY, led by a strong performance in the Trading business. In Q4FY22, EBIT from the Gas/LPG transmission business stood at Rs. 8.7b/ Rs. 0.8b, down 8% QoQ, but 4% YoY. EBIT for the Trading business came in at Rs. 17.2b. Petchem EBIT stood at Rs. 3.8b down 38% YoY, but up 4% QoQ. LPG and HC EBIT were lower than our estimate at Rs. 7.2b, up 54% YoY, but down 15% QoQ.

GAIL's stock advantages, and risks: Motilal Oswal

Mentioning the advantages, Motilal Oswal stated, "It is executing various projects worth Rs. 300b, spread over the next 3 years. The petchem plant currently operates at a utilization rate of 113% in 4QFY22. It will achieve a utilization rate of 115% in FY23 due to the opening up of the economy and better demand from the PATA plant. Petchem margin fell 26%/28%/31% QoQ in May'22 for PE/PP/PVC, but we expect the same to improve in the near term. Commissioning and ramp-up of various fertilizer plants are expected by Oct'22, which should aid volumes. Commissioning of the new fertilizer plant at Sindri, Barauni, and Gorakhpur will increase demand and aid profitability going forward. Owing to an in-line 4QFY22, we kept our estimates unchanged for FY23-24. We value the core business at 10x FY24E adjusted EPS of Rs. 17. PAT stood at Rs. 103B, up 112% YoY, translating into an EPS of Rs. 22.8, up by 110%."

However, risks remain; the firm informed, "EBITDA came in 4% lower than our estimate at Rs. 37.1b (up 45% YoY, but down 12% QoQ) due to a poor performance by the Petchem and LPG segment. PAT stood at Rs. 26.8b (7% lower than our estimate; up 41% YoY, but down 18% QoQ), translating into an EPS of Rs. 5.8."

About the company: GAIL

GAIL is India's leading natural gas company with diversified interests across the natural gas value chain of trading, transmission, LPG production & transmission, LNG re-gasification, petrochemicals, city gas, E&P, etc. It owns and operates a network of around 13,340 km of natural gas pipelines spread across the country. GAIL commands ~70% market share in gas transmission and has a Gas trading share of over ~ 50% in India. GAIL and its Subsidiaries / JVs also have a formidable market share in City Gas Distribution, with a large portfolio in the Liquefied Natural Gas (LNG) market. The company is expanding its presence in renewable energy like Solar, Wind and Biofuel.

Gas transmission volumes fell to 114 mmscmd (-2% YoY) in 4QFY22. The management expects volumes of ~120mmscmd once the fertilizer plants run at full utilization. The Transmission business is expected to grow at 8-10% CAGR over the next 3 years. Utilization from the company's Urja Ganga pipeline will touch 60-75% by FY23 end.

Disclaimer

The above stock was picked from the brokerage report of Motilal Oswal. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.