GSPL, GAIL Stand To Gain From New Gas Pipeline Tariff Rules, Say Analysts

The Petroleum and Natural Gas Regulatory Board or PNGRB's notification about natural gas pipeline tariff regulations, with effect from Nov. 18, will introduce numerous positive amendments for the natural gas transmission sector, according to analysts.

These regulations pertain to both gas pipeline tariffs and pipeline authorisations, which were originally proposed in August 2022.

PNGRB Update On Natural Gas Pipeline Tariff Regulations - Key Takeaways By Citi

• Introduction of more relaxed capacity utilisation/normative volume requirements – 30% to 100% (of 75%) over 10 years versus 60% to 100% (of 75%) over five years earlier.

• The aforementioned ramp-up would also be applicable for subsequent capacity expansion phases.

• Capacity increase of pipelines due to the addition of new gas supply sources will attract tariffs only after five years.

• The rules restricting a change in tariffs for capacity expansions of less t than 10% and requiring sharing of half the incremental tariff revenues for capacity expansions of more than 10% have both been done away with

• If actual volumes are less than normative volumes, the company will be allowed set-off credits that can be adjusted against future year volumes.

• The lower corporate tax rate will be applicable prospectively (i.e., from FY23) for tariff determination.

These changes will have positive implications for pipeline tariffs and should incentivise capex, analysts said. In terms of capacity determination, the requirement to share 50% of incremental tariff revenue with customers after more than 10% capacity expansion seems to be done away with -- this augurs well for Gujarat State Petronet Ltd's and GAIL (India) Ltd.’s existing network-based expansion, they said.

The source-based capacity holiday for five years post pipeline connectivity with the source would potentially benefit GSPL as a couple of new LNG terminals are coming up in Gujarat. Channel checks of broking house Emkay indicate that the pipeline entities are largely satisfied with the amendments, as it paves the way for future expansion. The note further says that overall, regulatory overtones seem positive for the industry.

Here is what brokerages have to say about the PNGRB's natural gas tariff regulation on GSPL and GAIL:

Gujarat State Petronet Ltd.

Citi

• We expect GSPL’s tariffs to likely be among the first to the finalised under the new tariff regime.

• Besides clarity on tariffs, we also believe the ramp-up in domestic gas production from the two KG blocks should drive an uptick in volumes starting next quarter.

• We correspondingly open a 90-day 'Catalyst Watch' on the stock.

Emkay:

• We have built in a 35-40% cut in GSPL’s tariff, but the same could be lower than this.

• We reiterate our 'Buy' rating on GSPL with target price of Rs 325 apiece.
  

GAIL (India) Ltd.

Citi

• GAIL’s three other businesses continue to face earnings headwinds – gas trading (Russian LNG disruption), LPG (weak realisations and higher gas costs), petchem (low utilisations and weaker realisations).

• GAIL could also be exposed to further APM gas cuts if the government
  looks to divert additional volumes to CGDs.

• We increase our target price from Rs 80 to Rs 90 as we increase our target multiple for the gas transmission business from 7.5x to 8x, in line with GSPL's standalone transmission business.

• We correspondingly upgrade the stock to 'Neutral' from 'Sell'.