Rate revision for GAIL pipelines a positive

Bigger trigger is revision for its three largest pipelines

The rate revision for GAIL's gas pipelines will have a positive impact on its financials. Recently, the Petroleum and Natural Gas Regulatory Board (PNGRB) revised transmission rates upwards for GAIL's Dadri-Bawana-Nangal and Chainsa-Jhajjar-Hissar pipelines by 18 per cent and 89 per cent, respectively. The two pipelines, carrying about five per cent of FY16 volumes, will help increase blended rates by eight per cent, according to analysts.

Earlier in July, GAIL's two more pipelines saw rate revisions. The Kochi-Bengaluru-Mangaluru saw 48 per cent upward revision while Dabhol-Bengaluru saw nine per cent downward revision. However, with four revisions in July and two more - Cauvery basin's 133 per cent upward revision in May and major Krishna-Godavari basin rates (up 715 per cent to Rs 45.3 per mBtu) in March - profitability is set to get a boost. mBtu is a million British thermal units. Analysts at Jefferies say six rate orders by PNGRB so far imply a Rs 340-crore increase in FY17 earnings before interest and tax or Rs 1.8 per share increase in earnings per share for GAIL.

The revisions represent a 150 per cent increase over existing revenues from these pipelines or a nine per cent increase of the total transmission revenues over FY16 despite these pipelines accounting for only six per cent of revenues. However, rate revision in the top three pipelines that contribute more than 90 per cent to total revenues, will have to be watched out for, given the larger impact.

Besides, in the near term, the performance in the June quarter and especially the turnaround in the petrochemical segment will be watched for closely. The Street had been expecting a reversal of fortunes in the March quarter itself after renegotiations of RasGas prices with Qatar in December.

Lower prices of imported gas were expected to help profitability of the petrochemical segment as the company used this imported gas as feedstock. However, losses in the March quarter disappointed. Analysts remain optimistic as they say the ramp-up at the Pata plant in Uttar Pradesh had been delayed but should contribute now. Analysts at Nomura say while the ramp-up was slow, the petrochemical segment should return to profit due to lower gas costs and higher polymer prices.

Sachin Mehta at Centrum Broking sees positive turnaround in petrochemical earnings (profit). Petrochemical unit realisations have remained marginally weak sequentially.

Analysts see a boost to trading and transmission business led by Petronet's Dahej expansions. For the stock at Rs 373, analysts have targets in a range, with Rs 440 on the higher side.