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Event update: Oil & Gas; New pipeline tariff order - Positive for GAIL and GSPL

EVENT – PNGRB issues tariff orders for 7 pipelines, including 4 of GAIL and GSPL’s Gujarat network

After prolonged delay, Oil & Gas Regulator Petroleum and Natural Gas Regulatory Board (PNGRB) has issued final tariff orders for 4 of GAIL’s transmission pipelines and the Gujarat pipeline network of Gujarat State Petronet (GSPL). Driven primarily by a change in the pipeline capacity assumed (nominal capacity for calculating tariffs changed to a maximum of 75% of nameplate capacity from year 5 versus 100% in July 2015), most tariffs while being well below what was proposed by the companies still implies a material 10-15% impact on blended tariffs for GAIL and >20% for GSPL.

IMPACT – Material FY19E upgrades vs IDFC estimates, FY20E sees marginal upgrades

GAIL finally gets clarity, albeit HVJ pipeline order remains pending with no clarity on uniform tariff yet: GAIL has received tariff orders for 4 pipeline networks; The entire Gujarat network, comprises 7 smaller sub networks, Agartala, Dukli Maharajganj and the larger Dahej Uran Panvel Dabhol network (DUPL-DPPL). While the approved tariffs are well below that propounded by GAIL, owing to differences in assumptions related to capex, operating expenditure, cost inflation, working days, internal consumption, etc. (Exhibit 1), the approved tariffs are still materially higher than the current tariffs. Our rough cut estimates suggest that the pipelines for which tariff orders have been received have transmission volumes of ~19.8 mmscmd or <18.8% of the total transmission volumes for GAIL. Therefore, the average increase is Rs3/mmbtu to blended tariffs of GAIL which is ~9.5% higher than FY18 average. Factoring in the pending HVJ-DVPL and HVJ-GREP upgrade pipelines, we estimate an average 15% increase in blended tariffs over FY19-20E, with 10% in FY19E and another 5% likely in FY20E.

GSPL network sees 20-25% uptick: Similar to GAIL, tariff orders for GSPL have been long awaited. The resolution of these orders in September itself (allowing the orders to apply from FY19 itself) comes as a positive surprise (we had pushed the entire tariff increase to FY20E due to their persistent delays). Additionally, the actual impact on blended tariffs of the 28/117% increase in high pressure and low pressure network respectively is difficult to accurately estimate, since the mix of actual flows between the two in FY19 and FY20E can be different than the standard volume assumptions used for the tariff calculations by PNGRB. Given past trends of reported tariffs versus nominal tariffs, we estimate FY19E tariff would be 25-30% higher than FY18 versus 23% suggested by the order.

FY19E EPS sees major upgrades, limited change to FY20E: As the announced tariffs are well above our FY19E estimates, the impact of this order on our FY20E estimates is not that material as we had already factored in material upgrades on FY20E numbers. Our target price for both companies is based off FY20E. As a result, we see only limited change in the same. In fact, we have affected a minor downgrade in GSPL to factor in the recent weakness in listed investment (Gujarat Gas). We reiterate our Outperformer rating on both, GAIL and GSPL, which trade at 10.7x and 7.6x FY20E EPS, respectively (net of value of listed investments).