GAIL shares: Why IIFL is bullish on the PSU stock?

Domestic brokerage and research firm IIFL said that they like GAIL (India) Ltd’s overall disclosures in the FY22 AR, which give good perspective on financial performance, growth opportunities and risks for each of its businesses. The capex heavy strategy 2030 envisages investments across core (transmission) and non-core (commodity) businesses.

“While its cash flows and balance sheet can support the ₹75 bn-90 bn p.a capex until 2025, we remain concerned on lumpy return ratios, and sub-par growth trajectory through FY25 - for which stock may trade below its SoTP - key triggers to re-rate include unification of tariffs for pipelines,” the note stated.

The brokerage house has Buy rating on Gail shares with a 12-month target price of ₹160 apiece. Govt-owned GAIL is a natural gas explorer and producer engaged in the natural gas processing and distribution in India.

“GAIL has a healthy balance sheet with one of the lowest D/E ratios across the O&G peers. It has a mix of commodity and regulated businesses that have helped generate robust cash flows, which it has reinvested in core business, and also step up pay-out to investors in the form of buyback and dividends. Its return ratios, however, have been erratic due to influence of commodity businesses in overall Ebitda (12- 50% share over the years),” it added.

While GAIL’s core business has grown at steady 8% p.a. over the years, the reported PAT has been erratic - largely due to LNG trading and polymer businesses, which are 45% of its overall Ebitda. 

“It has also weighed high on the return ratios. The OCF, regardless, has been > capex over the years; as such the ₹404bn cumulative OCF (FY18-22) has been utilised for funding capex (65%), dividends etc; in FY21/22, the effective payout to shareholders has seen marked increase,” it said. 

GAIL holds ₹63 bn investments in other PSUs whose market value is ₹93 bn; this could be liquidated and returned back to shareholders for enhancing ROE and value, IIFL's note added.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.