Axis Capital Limited, the renowned investment firm, recently initiated coverage on Gail (India) Ltd. (GAIL:IN) (OTC: GAILF) with a sell rating and a price target of INR185.00. This move comes as a result of the significant rise in LNG prices, which have surged by 40% in the past six months. Axis Capital's in-depth analysis forecasts a subdued compound annual growth rate (CAGR) of 3.3% in profit after tax (PAT) from FY24 to FY27E.
The firm's coverage report highlights that their earnings estimates for Gail are lower than the Bloomberg consensus by 11%, 18%, and 20% for FY25, FY26, and FY27E respectively. The expected slowdown in gas transmission volume growth is attributed to price-sensitive consumers, particularly in the power and industrial sectors, shying away from purchasing higher-priced LNG.
Moreover, the recovery of Gail's petrochemical business is expected to be less robust due to the increased cost of feedstock, primarily LNG. Axis Capital's report indicates that Gail's stock valuation is considered rich, trading at a price-to-book value (P/BV) of 2.1 times for FY26E, based on a 12% return on equity (RoE). Additionally, the enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) ratio is at 12.1 times, significantly above the ten-year average.
The sell rating by Axis Capital reflects a cautious outlook on Gail's financial performance amidst current market conditions and the company's valuation metrics. The price target of INR185.00 implies a potential downside of 23% from the current market price of the stock.
Analysis: Axis Capital's sell rating and price target for Gail (India) Ltd. indicate a challenging road ahead for the company, with risks to earnings stemming from escalating LNG prices. Investors should take note of the subdued growth prospects and rich valuation metrics, which may impact the stock's performance in the coming years.