Unified tariff a fresh trigger for GAIL

Will lead to higher realisations, better returns on new investments

The proposal by the Petroleum and Natural Gas Regulatory Board (PNGRB) to put in place a unified tariff for all pipelines is a shot in the arm for GAIL.
 
The stock, which gained nearly six per cent on Friday and another 3.5 per cent on Tuesday to close at Rs 433.60, can see more gains. The Street’s optimism stems from the fact that the new proposal, if accepted, will not only lead to improved tariffs for the company and consequently higher return ratios, but also boost gas demand.
 
Sector regulator PNGRB, has proposed to implement a “unified or pooled” method for computing gas transmission tariffs for cross-country pipelines or all connected ones of a company. GAIL, which has India’s largest pipeline network, stands to gain the most. Under the new method, the tariff will be computed by pooling capital and operating expenditures across pipelines and in proportion to cumulative volumes.
 
Analysts said such tariffs might then be applied on a zonal/postal and other geographical basis, according to the extant framework that allows 12 per cent post-tax returns. The proposal will also make gas transmission cost viable for new pipeline users and thereby help to develop the market in new geographies such as the Northeast and other regions.
 
The unified tariffs may also pave the way for an overhaul of regulatory frameworks. Analysts at Kotak Institutional Equities said the unified tariff would be a positive for GAIL as it would result in higher tariff realisations on existing pipelines, better returns on new investments and encourage overall gas consumption.
 
Analysts at Elara Securities said GAIL’s present weighted average transportation tariff was Rs 37.1 per million British thermal units (mBtu). It has requested Rs 68.88 per mBtu pooled tariff for 12 per cent post-tax return on capital employed with inclusion of capex of upcoming Jagdishpur-Haldia-Bokaro-Dhamra pipeline (JHBD). If most of GAIL’s recommendations are accepted, its earnings per share from transmission would improve by Rs 12.7 (from Rs 20 in FY17), the analysts said. Every Rs 10 per mBtu increase in weighted average or pooled tariff improves GAIL’s earnings by Rs 4 per share.
 

The news is positive for investors’ sentiment that remained subdued in the recent past as the start of higher-price gas contracts from the US impacted GAIL’s profitability. While GAIL has been positive on placement of fresh contracts, the stock continued trending lower till the recent negotiation of the Australian LNG contract by Petronet. The move fuelled hopes that GAIL would also be able to renegotiate its higher-priced US contracts.
 
While Kotak has set a target price of Rs 440, that of Elara is at Rs 495. Analysts at Elara Capital said US LNG viability concerns would dissipate with the completion of JHBD pipeline by 2020.