GAIL slips nearly 5% as CLSA downgrades it to 'sell' from 'outperform'

NEW DELHI: GAIL India Ltd plunged as much as 4.7 per cent in trade on Monday, after CLSA downgraded the stock to 'sell' from 'outperform', with revised target price of Rs 475 per share.

The Asia focused broker is of the view that the recent stock price rally completely ignores earnings risk from falling crude given its big sensitivity. Gail is trading at over 40 per cent premium to its 10 years average PE.

"We find these valuations unsustainable since turnaround in core business is unlikely in next two years and RoEs will remain under pressure. Downgrade to SELL from OPF," added the CLSA report.

Despite this big decline in RoEs, Gail is trading above its historical average PB valuations. Gail is also trading 40 per cent above its 10 year average PE.

CLSA is of the view that with recovery in core gas transmission business unlikely in next two years and EPS risk from low crude price, we find these valuations unsustainable. We have downgraded the stock to SELL with a revised target price of Rs475/share.

Return ratios to remain near all-time lows. The brokerage firm has also lowered FY15/16 EPS by 17/4 per cent. This will imply all-time low RoEs of 13.5-15 per cent through FY15-17 versus last 10 year range of 17-24 per cent.

Continued weakness in crude may put further pressure on these estimates as our FY16/17 crude price estimate of US$100/bbl is 20 per cent higher than spot prices.