Mass downgrades drag Gail despite in-line profit

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Published: November 4, 2014 4:16:01 PM

Despite posting better-than-expected bottom-line numbers for the three months to September 2014, state-run natural gas transmission company Gail India lost ground on Monday, with the scrip closing at R499 on the BSE, down 5.7% — the highest fall in more than five months.

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Even as Gail India managed to beat consensus estimates on the quarterly result, as many as 20 brokerages downgraded the stock. Analysts argued that the recent run-up in prices already discounted a possible removal of subsidy burden on the company by the government.

Gail reported strong y-o-y growth of 42% in net profit to R1,303 crore as it did not factor in any subsidy burden on the back of pending quarterly demand from oil ministry. Consensus estimates for the quarter pegged in a bottom-line of R994 crore, as per Bloomberg. The profit also surged on account of R289 crore of other income.

Foreign as well as domestic brokerages, including CLSA, Standard Chartered, Credit Suisse, CIMB, Kotak Institutional Equities and Edelweiss Securities, downgraded the stock since Friday. As a result, ‘sell’ ratings on the stock jumped to 49% of the total recommendations from 19% last month. The 12-month consensus target price on the stock after the downgrades stood at R468.7, 6% below the current price.

CLSA downgraded the stock to ‘sell’ from ‘outperform’, with a revised target price of R475 a share. In a report titled “Running ahead of itself”, it termed Gail’s current valuations – the stock is trading at a 40% premium to its 10-year average price to earnings —  unsustainable given that a turnaround in core business is unlikely in the next two years and return-on-equities (RoEs) will remain under pressure.

Kotak Institutional Equities, which also downgraded the stock to ‘add’ from ‘buy’, however, remained positive on the stock due to medium-term triggers from, potentially higher tariffs and gradual increase in volumes.

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