GAIL: Unified tariff proposal adds a fresh trigger

The company's earnings visibility can improve with implementation of unified tariff

GAIL’s prospects got a boost with the Petroleum and Natural Gas Regulatory Board (PNGRB) proposal of unified tariff for all pipelines. The stock gained more than 8 per cent intraday on Friday before closing 5.75 per cent higher at Rs 419.10 levels. The proposal if accepted not only can provide boost to gas demand but also help GAIL see improved tariffs and consequently higher return ratios.

PNGRB has proposed consultation on the implementation of integrated authorization of unified/pooled tariff for cross-country gas pipeline network or all connected pipelines of GAIL. The unified or pooled tariff for the network will be calculated by pooling capital expenditure and operating expenditure across pipelines and in proportion to cumulative volumes. Analysts say that such tariffs may then be applied on a zonal/postal and other geographical basis, as per the extant framework that allows 12 per cent post-tax returns. The proposal is also in order to make gas transmission cost viable to new pipeline users and thereby to help develop the gas market in new geographies as North east and other regions.

The proposal for consultation means that the Board is seriously considering implementation in near-term and unified tariffs may also pave the way for an overhaul of regulatory framework, which may add to the gains, feel analysts.

Analysts at Kotak Institutional Equities say that unified tariff will be a significant positive for GAIL as it will result in higher tariff realizations on existing pipelines, better returns on new investments and encourage overall consumption of gas.

Analysts at Elara Securities believe that any positive development would be significantly positive for GAIL as its present weighted average transportation tariff is Rs 37.1/mmbtu (million British Thermal Units), and GAIL has requested Rs 68.88/mmbtu pooled tariff for 12 per cent post-tax RoCE returns with the inclusion of capex of upcoming Jagdishpur-Haldia-Bokaro-Dhamra pipeline (JHBDPL). They feel that if most of the GAIL’s recommendations are accepted, company’s earnings per share from transmission would improve by Rs 12.7. Every Rs 10/mmbtu increase in weighted average or pooled tariff improves GAIL EPS by Rs 4.0/share.

The news is positive for investor sentiment that has remained subdued in the recent past as start of higher price gas contracts from US can impact the company’s profitability. The company though had been positive on the placement of fresh contracts in the domestic and international arena but the stock price had continued trending lower till the recent negotiation of Australian LNG contract by Petronet, which improved hopes that GAIL would also be able to renegotiate its higher price US contracts. The news on unified tariff would further prop up street sentiments as the outlook on forward earnings improvement increases. While Kotak has given a target price of Rs 440, Elara’s is at Rs 495. Analysts at Elara capital say that US LNG viability concerns would dissipate with the completion of JHBDPL pipeline by CY20 that would connect five fertilizer plants.