Nomura lowers GAIL rating, prefers RIL in oil & gas sector

Mumbai: Nomura has downgraded its rating on GAIL India to ‘reduce’ from ‘buy’ and cut the target price to 85 from 140 citing double whammy of low prices and demand destruction. The brokerage prefers Reliance Industries in India’s oil and gas sector.

It said a sharp decline in oil prices has weakened GAIL’s earnings outlook, while the prolonged lockdown because of Covid-19 has weakened the demand outlook.

The brokerage expects India’s gas consumption to decline around 25 per cent in the June quarter and 11 per cent in FY21. It believes there will be a longer-term impact as demand may not recover entirely in several segments and new fertiliser or city gas projects are likely to get delayed.

GAIL shares ended at Rs 100.90, down 3.68 per cent, on NSE on Tuesday. The stock is up 54 per cent from its March lows while the Nifty index is up 34 per cent from its March low.

“A sharp demand decline is worrisome for GAIL, as it has a large portfolio of LNG import contracts, particularly Henry Hub (HH)-linked contracts. With weak demand and new domestic gas from KG-basin, LNG imports outlook has become bleaker,” said Nomura.

The brokerage has cut FY21-22 earnings estimates by 43-46 per cent.

“Due to large unhedged positions, marketing losses and earnings volatility can be very high,” said Nomura.