On Friday, Axis Capital (NYSE:AXS) Limited initiated coverage on Gail (India) Ltd. (GAIL:IN) (OTC: GAILF) with a sell rating and a price target of INR185.00. The firm pointed to risks to earnings due to a significant rise in LNG prices, which have increased by approximately 40% in the past six months. Axis Capital's analysis suggests a subdued compound annual growth rate (CAGR) of 3.3% in profit after tax (PAT) over the forecast period from FY24 to FY27E.
The coverage report highlights that the firm's estimates for Gail's earnings 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 was attributed to the reluctance of price-sensitive consumers, such as those in the power and industrial sectors, to purchase higher-priced LNG.
Furthermore, the recovery of Gail's petrochemical business is anticipated to be less robust due to the increased cost of feedstock, which in this case is LNG. The report from Axis Capital suggests that the valuation of Gail's stock is considered rich, trading at a price-to-book value (P/BV) of 2.1 times for FY26E, which is calculated for a 12% return on equity (RoE). Additionally, the enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) ratio stands at 12.1 times, both metrics being more than two standard deviations above the ten-year average.
The sell rating by Axis Capital reflects a cautious outlook on Gail's financial performance in light of current market conditions and the company's valuation metrics. The price target of INR185.00 suggests a potential downside of 23% from the stock's current market price.
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