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MOSL: GAIL INDIA (Neutral)-Awaiting last of the triggers amid rising concerns on LPG, petrochem and trading segments

GAIL INDIA: Awaiting last of the triggers amid rising concerns on LPG, petrochem and trading segments

(GAIL IN, Mkt Cap USD11.8b, CMP INR360, TP INR348, 3% Downside, Neutral)

 

• The Petroleum & Natural Gas Regulatory Board (PNGRB) is expected to announce a tariff hike for the Hazira-Vijaipur-Jagdishpur (HVJ) and expansion pipelines soon.
• After these, however, there are no significant positive triggers for GAIL in the medium term.
• We highlight how LPG, petrochem and trading segments could disappoint in the future. 

HVJ and HVJ up-gradation account for a large part of the gas transmission

• HVJ accounted for 29.5mmscmd and HVJ upgradation accounted for 35.9mmscmd of transmission volume, ~62% of the total transmission in FY18.
• GAIL charges levelized tariff of INR25.46/mmBtu on HVJ and INR53.65/mmBtu on HVJ upgradation; it has now proposed for both to be increased to INR175.2/mmBtu and INR88.09/mmBtu, respectively, or an integrated tariff of INR97.04/mmBtu (existing INR34.7/mmBtu) for both pipelines.
• We estimate that if both are approved, it would increase the EPS of GAIL by 81% in FY20. However, in the recent revisions in Sept’18, PNGRB’s approved tariffs were ~60% lower than what was proposed. We estimate that ~40% increase in tariff of HVJ and HVJ up-gradation would increase GAIL’s EPS by 15% only. 

LPG over-supply to hurt

• Since 2010, an abundance has been observed in shale Natural Gas Liquids (NGLs) in the US, this has resulted in 8.7% CAGR production growth of LPG from shale to 2.1mnbopd in 2018.
• Shale gas-based LPG is cheaper than refinery-based LPG, and therefore, LPG prices are under stress, with global LPG trade flows changing in favor of US LPG.
• LPG and liquids form 27% of GAIL’s EBITDA and we expect weakening LPG prices to have an adverse impact on the same.