GAIL (India) Limited's (NSE:GAIL) Business And Shares Still Trailing The Market

GAIL (India) Limited's (NSE:GAIL) price-to-earnings (or "P/E") ratio of 8.3x might make it look like a strong buy right now compared to the market in India, where around half of the companies have P/E ratios above 25x and even P/E's above 48x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

GAIL (India) certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for GAIL (India)

If you'd like to see what analysts are forecasting going forward, you should check out our free report on GAIL (India).

What Are Growth Metrics Telling Us About The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as GAIL (India)'s is when the company's growth is on track to lag the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 54% last year. EPS has also lifted 12% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings growth is heading into negative territory, declining 19% over the next year. That's not great when the rest of the market is expected to grow by 25%.

In light of this, it's understandable that GAIL (India)'s P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On GAIL (India)'s P/E

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of GAIL (India)'s analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 2 warning signs for GAIL (India) (1 can't be ignored!) that you should be aware of.

If these risks are making you reconsider your opinion on GAIL (India), explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.