51% return? How GAIL India stock may make you rich - Nomura gives buy rating

The Monday’s trading session was positive for Dalal Street, with Sensex finishing at 39,784.52 up by 168.62 points or 0.43%, while Nifty 50 ending at 11,922.70 above 52.05 points or 0.44%. While the day seemed fruitful for benchmark indices, however, Gail India share price saw an opposite trend. The stock price of Gail India closed at Rs 307.50 per piece down by 2.02% on Nifty. In fact, now is the right time to buy Gail India, in order to bag hefty gains in your kitty. 

Anil Sharma and Aditya Bansal, Research Analysts at Nomura said, “Regulator PNGRB (petroleum and natural gas regulatory board) has determined the long-awaited final tariffs for GAIL’s HVJ-GREP-DVPL (HVJ) and DVPL/GREP (upgradation) networks. Final tariffs for both HVJ (+72%) and upgradation (+6%) saw an increase, with a volume-weighted tariff increase of nearly 27% (vs our assumption of 30%).”

The duo explained that, as both HVJ and upgradation networks are fully integrated with each other, GAIL has for long been seeking one single network tariff. In earlier provisional tariff orders, the regulator had insisted on determining separate tariffs for each network. While the regulator has now decided to determine an integrated levelised tariff, the method of determining the integrated tariff is perplexing to us. 

Further, talking about the tariff revision, Nomura analysts said, “Tariffs for both HVJ and upgradation networks are determined on discounted cash flow (DCF) method, with post-tax return of 12% (pre-tax 18.2%). Ideally, in our view, the integrated tariff should have been a volume weighted average tariff of the two networks, and should largely have been revenue neutral for GAIL, to ensure similar returns.”

According to the duo, GAIL is required to submit zonal apportionment of final tariff in the next seven days. We expect zonal tariffs to be finalised in June itself, and the revised tariff would then be applicable from 1 July 2019. 

On stock price, the duo said, “We use a sum-of-the-parts valuation method as our primary tool in valuing GAIL’s diversified business. We value the gas transmission business at 8x FY21F EBITDA. We use a 4x FY21F EBITDA for gas trading. We assign 6x FY21F EBITDA for petrochemical and LPG business. Our target price is INR465, implying 34% upside. The share is trading at 10x FY21F P/E (FY21F EPS: INR35/share).”

If compared with current price of Rs 307.50 with target price, then Gail India is set to rise by nearly 51% ahead.