Rate revisions to boost GAIL's fortunes

KG Basin pipeline's new rates are better than expected; those of other pipelines, too, to be higher

GAIL has got a leg-up as the Petroleum and Natural Gas Regulatory Board revised the rate for its KG Basin network pipeline to Rs 45.3 per million British thermal units (mBtu), significantly higher than the current provisional one of Rs 5.6 per mBtu. Not surprisingly, the stock is up seven per cent to Rs 364 over two days.

Although output from the KG basin network is not high and GAIL’s share currently comes to only five- six million standard cubic metres per day (mscmd), a revision for its other pipelines is expected over the next two or three months.  While Sachin Mehta at Centrum Broking says he expects gains from rate revision in newer pipelines that are currently under-utilised (30-40 per cent), analysts at IIFL say revision for the KG basin network is a precursor of a material change in fortunes for GAIL over FY17-18. The latter assumes a 10 per cent increase in blended rates for GAIL over FY17.

The favourable revision and other developments should boost its stock, which had under-performed   because of concerns on under-utilisation of pipeline assets. This scenario is also changing. There were few takers for higher priced imported gas, impacting GAIL’s transmission business volumes and margins. However, the revised liquefied natural gas (LNG) contract with Qatar’s RasGas, lowering prices of imported LNG, has already brought respite. This will also reverse the pressure on profitability as the expensive imported gas was being used as feedstock for its petchem capacities. Further, gas pooling by the power sector will contribute to higher transmission volumes.

Considering the current increase is applicable in FY17, while Mehta expects a Rs 190-crore upside in GAIL’s earnings before interest, taxes and amortisation (Ebitda) and Rs 1 in earnings per share (EPS), others expect higher gains — Ebitda of up to Rs 270 crore and EPS of Rs 2.6. These gains are considered on non—recurring basis, the economic life of the pipeline ends in February 2017.

But, if GAIL applies for an extension and gets it, the same will be another trigger as it will further boost GAIL’s earnings in subsequent years.  With respect to gas-pooling, analysts at IIFL say, “Bidding interest from south-based power plants in the latest round of bidding for pooled gas suggests an additional four-five mscmd of gas can flow through this (KG basin network) pipeline”. This implies further after-tax benefit of Rs 70 crore, or Rs 0.6 a share for FY17, assuming 50 per cent tariff for Power System Development Fund.