GAIL stock takes 12% knock on tariff revision, modest uptick in HVJ levy

GAIL (India) lost nearly 12 per cent on the bourses to its three-month lows after the regulator revised transmission tariffs. Petroleum and Natural Gas Regulatory Board (PNGRB) announced the much awaited revised tariff orders for GAIL’s pipeline networks that include Hazira-Vijaipur-Jagdishpur (HVJ network), Dahej-Vijaipur, Vijaipur-Dadri, provisional tariff for under-construction Jagdishpur-Haldia-Bokaro-Dhamra Pipeline (JHBDPL), and Mumbai Regional Natural Gas Pipeline Network. 

The major disappointments were on account of the regulator’s integrated tariffs for HVJ network (both for the old network as well as the upgraded part) and provisional tariff for JHBDPL network. HVJ network remains important as it transmits about 60 per cent of GAIL’s transmission volume, say analysts. It consists of two broad sections. One is the HVJ pipeline (length: 4,222 km, capacity: 57.3 million metric standard cubic metre per day, or mmscmd). The other is HVJ-Upgradation (length: 1,280 km; capacity: 54mmscmd), according to Antique Stock Broking.

The integrated tariffs for HVJ network decided by the regulator leads to a surprisingly modest increase in blended tariffs for GAIL (about 4 per cent), contrary to the sharp increase in regulated tariff calculation that the Street had anticipated. 

Analysts at Kotak Institutional Equities imply that had the regulator adopted separate tariffs for old and new networks, the blended increase would have been a robust 27 per cent, well ahead of theirs as well as the Street’s expectations. Analysts at Nomura feel that rather than calculating integrated tariff on a volume-weighted average, the regulator has calculated integrated tariff on a separate discounted cash flow for the integrated network. 

Thus, PNGRB’s decision to implement integrated tariffs for HVJ network increases blended tariffs to Rs 41.1 per million British thermal units (MBtu), from Rs 39.6 per MBtu. The determined integrated tariff is nearly 18 per cent lower than the weighted average tariff of Rs 50 per MBtu, say analysts. 

Against this backdrop, analysts at Kotak Institutional Equities have cut forward earnings estimates by 3-4 per cent. Nomura, on the other hand, expects GAIL to appeal against the integrated tariff in the appellate tribunal and even in higher courts. 

The Street’s disappointment was further compounded by provisional tariff for the JHBDPL pipeline. The PNGRB set the provisional tariff for the first phase of the pipeline, which is 58 per cent lower than what GAIL had asked for. After the decision, CLSA had downgraded its rating on GAIL and cut its target price.

Analysts at Emkay Global, too, have reduced 2020-21 (FY21) estimated earnings by 11 per cent each, building in Mumbai network hike and JHBDPL-approved tariff with some minor changes in trading margins and petchem estimates.

While tariff revisions were lower, there are some positives. The company will continue to benefit from growth in gas volumes, led by strong demand, higher availability, and marketing profits. 

Though the petchem segment profitability remains under pressure, any rebound can drive earnings. The higher priced liquefied natural gas’ ‘take or pay’ contracts have remained a cause for concern. Nevertheless the company had indicated that over 90 per cent of the US volumes have been sold at lucrative oil-linked prices for FY21. The commissioning of fertiliser plants on Jagdishpur-Haldia pipeline by 2021 can reduce forward concerns too. Additionally inclusion of gas under the goods and services tax can benefit GAIL.

Meanwhile, investors need to be watchful of any development on the bifurcation of GAIL (separation of marketing and transportation units), as reports suggest the same is now being considered by the government.