GAIL India rises 5% as Morgan Stanley, and Jefferies look at growth triggers Nov 6 Shares of GAIL India gained 5% on November 6 as the firm delivered strong Q2 September-end 2024 earnings. The supportive cues from international brokerages like Morgan Stanley and Jefferies would only add to growth prospects for GAIL. So, a favourable re-rating could be expected. GAIL India’s shares are up 60% for the last fiscal year alone, a pace that leaves the Nifty way behind at 23%. In an article looking at what has been driving GAIL forward and why analysts think the rise will continue, digging into its Q2 profits.
GAIL reported a consolidated net profit of Rs 2,690 crore for Q2FY25, up by 10% from last year. Revenue from operations witnessed a slight year-on-year growth, at Rs 33,981 crore, as against Rs 33,049 crore. These results depict the company’s strong resilience and growth in this competitive energy sector landscape. The quarterly performance was buttressed by impressive metrics in its gas transmission and petrochemical segments.
Key Performance Metrics:
Natural Gas Transmission Segment:
EBITDA for this segment increased to Rs 1,402 crore as against Rs 1,294 crore in Q2 of the previous year on account of volume growth and expanded domestic gas penetration.
Petrochemicals:
The petrochemical segment of GAIL reported an EBIT of Rs 146 crore, the highest since Q2 FY11, with a strong recovery from a loss of Rs 161 crore reported in the same quarter last year. Management is optimistic about the profit prospects of the segment for the remainder of the fiscal year.
Gas marketing-EBIT of the business segment of gas marketing came down from Rs 1,722 crore last year to Rs 1,254 crore in this quarter. Therefore, the downturn was well-controlled by better performance in the other segments of the business.
GAIL’s Q2FY25 results display a balanced performance portfolio of the company where its petrochemical, as well as natural gas transmission business, was showing good growth even as the gas marketing business faced some challenges.
GAIL India’s Analyst View:
Morgan Stanley and Jefferies have upgraded GAIL India with a positive rating citing the potential growth of the firm along with an attractive risk-reward profile. Here are some views from the respective firm:
1. Morgan Stanley: ‘Overweight’ Rating with a Target Price of Rs 258
The firm has kept its view as ‘Overweight’ on GAIL India while setting a target price of Rs 258 per share for the firm. Brokerage says that GAIL has a very strong return on equity at 19% from gas pipelines and ongoing volume growth is the other key catalyst for the stock. Morgan Stanley believes that GAIL’s extensive pipeline infrastructure will reap the benefits of rising domestic demand for natural gas over the long term. The company feels GAIL will give stable earnings as the stock is rated at 1.2 times the estimated FY26 price-to-book ratio.
2. Jefferies: Rating upgraded to ‘buy’ with a target price of Rs 240
Jefferies upgraded GAIL India to ‘buy’. The share was targeted at Rs 240. Despite a slight year-on-year decline in EBITDA growth, Jefferies believes there is still room for improvement in terms of market share and profitability. The firm’s confidence in GAIL has been enhanced by the growing pipeline network, which will be strengthened further with new projects being rolled out by mid-2025. Besides, Jefferies is estimating a robust compound annual growth rate of 9% in EBITDA from FY24 to FY27, led by globally benign gas prices and efficient operations in the gas and petrochemical sectors.
The GAIL stock has corrected about 20% from recent highs, finding both brokerages attractive entry points for long-term investors.
Growth Catalysts and Investment Drivers
The growth prospects of GAIL are well buoyed by a combination of favourable market dynamics, the expansion of infrastructure, and prudent financial management. Several growth triggers are expected to drive value for GAIL’s shareholders over the coming years.
The domestic gas demand is increasing, and the policy for India’s energy has always been to focus on cleaner fuel sources. India needs a source of cleaner fuel to be used by the nation in the production of energy. GAIL’s gas pipeline infrastructure thus finds an appropriate niche where it can leverage this increase in domestic demand.
1. Expansion in Pipelines:
GAIL is further expanding its pipeline network to distribute extra regions and hence will increase its competitiveness. It can increase the capacity for distribution by mid-2025 through new pipelines, which will enhance the strength of the position of the company in the market.
2. Petrochemical Segment Bounceback:
GAIL’s petrochemical segment has shown a strong return in Q2FY25 with EBIT turning positive at Rs 146 crore versus losses of Rs 161 crore in the same quarter last year. Management states that this segment is profitable and steady, adding predictable revenue streams to the basic gas business.
3. Lower Global Gas Prices:
This has continued to be beneficial for GAIL’s operating cost, mainly in its trading division, with the very low prices at Henry Hub. According to Jefferies, it will continue to add to growth in EBITDA from here, thereby adding even more to GAIL’s bottom lines in the medium term.
4. Strong Capex:
GAIL’s capital expenditure in Q2FY25 was at Rs 1,885 crore. This was largely spent on pipeline development and petrochemical projects. Total capex in the first half of FY25 touched Rs 3,544 crore. This speaks about the company’s intent towards infrastructure spending. Such an active approach would enable the company to keep the growth going and make operational efficiencies improve.
Financials and Market Leadership
GAIL’s finances appear healthy with a year-to-date stock increase of 18% against a 10% Nifty return. The robust performance over the last year is seen at 60%, indicating growing investors’ confidence in its growth story as it remains out of the broad market pace.
Morgan Stanley’s and Jefferies’ positives suggest that GAIL has a good amount left for share price appreciation while indicating a strong revenue reservoir. In addition, the latter added to its asset book for a couple of consecutive years, thus providing revenue augmentation prospects. The corrected correction in stock price also has made Q2-affected stock more attractive now since the brokerages from either side are expecting further hikes from the present levels. KEY Challenges and Risks:
Although GAIL’s outlook is still optimistic, there could be several headwinds that come in its way. The natural gas business is susceptible to global energy price movements, which could impact the company’s margins. Competition from renewable sources of energy and a change in regulations that favour alternative fuels can impact long-term demand for natural gas. GAIL management is working to mitigate such risks by continued investment in infrastructure and operational efficiency.
Investor Outlook
GAIL India represents a unique long-term exposure opportunity, especially in terms of the Indian energy infrastructure space. The Q2 results are underpinned by pretty solid fundamentals. Pipeline expansions are also aligning well with India’s goal to have natural gas penetration. GAIL would emerge as a well-diversified revenue base with the company’s increasing market reach as it grows and would remain a value-added portfolio for a growth seeker.
Morgan Stanley and Jefferies have positive views about GAIL and are quoting the stock at price targets of Rs 258 and Rs 240, respectively. They expect GAIL to navigate through the industry headwinds and emerge with an opportunity to benefit from emerging opportunities. For a long-term investor, steady performance by GAIL, strategic investments, and good market position would be more than enough reasons to hold on to or accumulate the energy giant’s shares.
Conclusion
The 5% post-earnings rally of GAIL India speaks volumes about the resilience and growth potential, as the company has been steadily moving forward in all the key business segments. Analysts at Morgan Stanley and Jefferies point out that strong operational performance, expansion of infrastructure, and solid market position are the major drivers of positive sentiment.
In an increasingly fluid energy landscape, strategic pipeline expansion, petrochemical profitability, and capturing the tailwind of low global gas prices put GAIL in an excellent position for sustainable growth. For investors, GAIL India is an exciting long-term investment idea with great upside potential and a robust risk-reward profile. As India’s energy sector continues to transition towards cleaner sources of energy, established infrastructure and forward-looking strategies at GAIL ensure the company remains well positioned.
GAIL India, with a healthy Q2 performance, optimistic analyst expectations, and definite growth drivers, is well placed to continue on its positive track and hence should be in focus for future quarters.
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