Buy GAIL India, target price Rs 140: Nomura

Nomura has maintained a buy rating on Gas Authority of India (GAIL) but cut the target price from Rs 190 to Rs 140. Low commodity prices will impact petchem/ LHC/ marketing segments; but, the worst seems priced in. GAIL was trading at Rs 78.60 on Tuesday, up 1.34 per cent from Monday’s closing of Rs 78.15.

GAIL (India) Ltd., incorporated in 1984, is a largecap company with a market cap of Rs 35525.15 crore, operating in the gas & petroleum sector.

Investment Rationale

There were concerns over the commodity businesses due to low oil prices, Since the disappointing integrated HVJ tariff order on 4-June-19, GAIL's share price has de-rated significantly (-57 per cent since end-May). Apart from the disappointing tariff order, the stock was also hit by weak gas demand/ low spot LNG prices impacting gas marketing, continued petchem losses and market concerns on its unbundling. .

The steep decline in oil prices weakens the earnings outlook for petchem/ liquid hydrocarbon (LHC) segments, as revenue declines may not be offset by lower feedstock costs. Petchem will remain in losses, but LHC should be relatively better. Market concerns also rise for gas marketing, especially on Henry Hub-linked volumes that are sold on oil linkage basis, despite GAIL hedging part of the exposure.

Financials

For the quarter ended 31-12-2019, the company reported consolidated sales of Rs 17882.74 crore, down -1.93 per cent from last quarter sales of Rs 18235.45 crore and down -11.55 per cent from last year's same quarter sales of Rs 20217.54 crore. The company has reported net profit after tax of Rs 1015.10 crore in the latest quarter.