Lower pipeline tariff hike likely to weigh on GAIL's earnings outlook

PNGRB's lower-than-expected tariff hike has dampened sentiment around GAIL, with analysts expecting only modest earnings support even as transmission volumes

The secular logic for investment in GAIL is growing gas demand, which is driven by a policy push for increasing gas in the energy mix, alongside upcoming new LNG (liquefied natural gas) global export capacities. GAIL’s results for the second quarter of 2025-26 (Q2FY26) were somewhat disappointing.

 

The company is aiming to become a fully integrated midstream-to-downstream gas player. Management aims at gas transmission volumes of 135 million standard cubic meters per day (mscmd) after FY28. The expansion and commissioning of pipelines in FY26 and FY27 will create capacity for volume throughput.

 

The new gas pipeline tariffs as mandated by the Petroleum and Natural Gas Regulatory Board (PNGRB) to be ₹65.69/million British thermal unit (mbtu) from ₹58.61/mbtu clearly disappointed the market. The 12.1 per cent hike is lower than consensus expectations of 15 per cent increase and way below GAIL's demand for ₹78. The tariff hike will probably push up GAIL’s FY26 and FY27 earnings by 2.8 per cent and 3.4 per cent, respectively.

 

Some analysts noted that the realised tariffs could be lower since current hike in tariffs reflects revision in only two parameters — an increase of ₹5.16/mbtu on account of higher system-use-gas (SUG), and a rise of ₹1.92/mbtu on account of lower volume divisor. The regulator has deferred review of other parameters to FY28, on the logic that considering everything could lead to a material increase in tariffs and place unexpected financial pressures on users.

 

GAIL’s Q2FY26 operating profit and adjusted net profit were down 14.8 per cent and 17 per cent year-on-year (Y-o-Y), respectively. Operating profit was down 4.3 per cent quarter-on-quarter (Q-o-Q) but net profit was up 17.5 per cent Q-o-Q. A lower margin for gas transmission Q-o-Q was offset by better performance of the gas marketing segment. The net profit was boosted by higher other income (up 172 per cent Q-o-Q).

 

Going forward, operating profit could rise in FY27, with transmission volume bouncing back after issues faced in FY26 and the above-mentioned tariff hike. Also, petchem losses may reduce due to a possible recovery in polymer margins.

 

The gas marketing segment profit of ₹1,300 crore rose 22 per cent Q-o-Q as realised margins jumped 20 per cent Q-o-Q on stable volumes. The petchem segment profit declined with a loss of ₹300 crore versus a loss of ₹250 crore in Q1FY26. This was due to the higher cost of Henry Hub gas, which offset 18 per cent Q-o-Q increase in sales volume. The LPG & LHC segment profit of ₹110 crore was up due to 7 per cent Q-o-Q drop in global LPG prices.

 

Pipelines utilisation was 59 per cent, with gross margins up 7.1 per cent Y-o-Y and down 10.3 per cent Q-o-Q. LPG transmission volumes were higher but margins declined. Gas trading volumes were stable Q-o-Q but margins were better.

 

LPG and LHC sales volumes were up Q-o-Q while the realisation was up 4.2 per cent Y-o-Y and 2 per cent Q-o-Q. In city gas distribution (CGD), there has been accounting changes, with bulk CGD volumes shifting to natural gas marketing in the consolidation accounts.

 

In FY26, GAIL is likely to see earnings drop due to a decline in gas transmission volumes while margins stay stable. The pipeline tariff revisions should enhance revenue certainty despite the lower-than-expected hike. In petchem, there will be a positive margin impact due to expansion of PP, PDH and PDTA, and lower Henry Hub-linked feedstock costs for PATA. CGD may deliver consistent volume-led growth. The Dabhol LNG Terminal may see higher traffic of around 34-36 cargoes versus 21 cargoes in FY25. Capex execution is likely to be around ₹13,000 crore annually.

 

GAIL cut FY26 transmission guidance to 123–124 mscmd (earlier 128-132 mscmd) due to delays in pipeline connectivity, refineries shutdown, and low demand from the power sector. In FY27, volume guidance is at 133-134 mscmd, and marketing guidance is of ₹4,000-4,500 crore PBT in FY26.

 

The market response to the disappointing tariff hike was heavy selling. Analysts had mixed responses but the consensus seems to be negative.