Tariff, Zonal Rule Changes To Benefit Gas Companies, Say Analysts

Proposed regulatory changes on gas transmission pipeline tariffs and zonal rules could lower operating costs for city gas distribution companies and allow higher tariffs for producers, according to analysts.

The Petroleum and Natural Gas Regulatory Board has proposed the tariff computation on the price of gas would be based on contracted prices for domestic or LNG.

The amendment proposes to move from three zonal tariffs to two, with zone one tariffs applicable for CNG and domestic PNG. Customers beyond the first 300 km of the length of the pipeline will be simply part of zone two.

These adjustments may eventually raise the tariff of zone one by 20-30% above the current level, but this will lead to savings for city gas entities with a high share of volume from the priority sector, CLSA said.

According to the brokerage, the clearest winner of this is likely to be Indraprastha Gas Ltd. and city gas entities in the northern and eastern regions, as they would fall under the highest tariff zone — zone three —currently.

Mahanagar Gas Ltd. should also gain, but as its current zone could be a blend of zones 1, 2, and 3, depending on the source of its gas, its gains may only be a proportion of that of IGL.

At the margin, this could lead to a small hike in the costs of other gas users, including the industrial customers of Gujarat Gas Ltd.

Pipeline entities will be permitted to retain 50% of incremental revenues, if their actual volumes exceed the normative threshold of 75% capacity utilisation, as per the petroleum board's proposals.

Morgan Stanley said the changes, if implemented, would accelerate India's natural gas adoption from 6% of energy mix to 15% penetration. GAIL India Ltd., Oil India Ltd., and Reliance Industries Ltd. will benefit the most, followed by Gujarat State Petronet Ltd, it said.

Citi has initiated a 90-day 'Positive Catalyst Watches' on GAIL India and GSPL. It has raised the target price for GAIL from Rs 260 to Rs 265 and on GSPL to Rs 370.

GAIL's tie-up with US gas contracts significantly reduces margin uncertainty and the company can comfortably meet its guidance for the segment, following a disappointing December quarter.

Analysts also expect the regulatory changes to be formalised by the June quarter.