I valued GAIL (India) back in June for the second time in the last 6 months and had a bullish outlook on the stock. I had invested in it in April when I found it grossly undervalued and the stock moved towards my intrinsic value in those 2 months. The stock had since then regressed and lost almost all of the 20% it gained from April to June. GAIL released their Q1 numbers this past week and I took another look at the valuation. I chose to keep the story same as I saw nothing in the last 2 months that altered my viewpoint about the company.
Numbers and Narratives
Gail (India) is a major player in the natural gas value chain of India. It is a monopoly garnering close to 70% share in the market. I expect it to have a growth rate of a mature company combined with the growth of natural gas market in India. I also expect it to keep greater than average margins given its competitive advantages.
The core numbers that I arrive at based on the story are
- Compounded revenue growth for next 5 years = 9% COVID Adjusted (8% industry average)
- EBIT margin in year 5 = 15% (~15% industry average)
- Initial cost of capital = 8.11%
Valuation
I’ve used the above numbers along with the financial information to compute my DCF valuation for GAIL (India) as seen below.
As you can see, the valuation price came out to ₹233.45, about 57% higher than the last traded price of ₹148.75.