GAIL to benefit from PNGRB tariff revision

The Petroleum and Natural Gas Regulatory Board (PNGRB) has declared the provisional transmission tariff for GAIL’s HVJ-DVPL pipeline network. The tariff for HVJ-DVPL has been separated into two parts: (1) tariff for existing network, and (2) tariff for new expanded DVPL network. The tariff for the existing network has been kept almost flat at Rs 960/mscm (Rs 25.5/ mmbtu), while the tariff for the new expanded network is fixed at Rs 2,014/mscm (Rs 53.7/mmbtu; newly introduced).

GAIL is increasing the HVJ-DVPL capacity from ~57 mmscmd to 110 mmscmd by April 2011. As a result of the proposed tariff changes, the blended tariff for HVJ-DVPL has been increased by 45% to Rs 1,385/mscm (FY12) and will lead to 18% increase in our FY12E EPS from Rs29.1 to Rs34.1.

New higher tariff sets tone for future pipeline tariff: The tariff for GAIL’s new pipeline network is considerably higher than the currently prevailing tariff, and largely in line with Reliance Gas Transportation Infrastructure Ltd’s (RGTIL) East-West Pipeline tariff. Also, the tariff clears the uncertainty of regulatory overhang and positively sets the tone for tariff determination of the three new 64mmscmd cross-country pipelines that GAIL is laying.

Valuation: We remain positive on GAIL primarily due to: (1) long-term revenue visibility, (2) value creation through the CGD business, (3) potential upside from its E&P business, and (4) likely favourable policy decision on subsidy. We believe that the Kirit Parikh Committee recommendation of taking GAIL out of the subsidy sharing augurs well for the stock. However, its implementation needs to be watched. Incrementally, as the earnings from transmission business account for >65% of its profitability (pre-subsidy), we believe GAIL will begin to command utilities business multiples.

45% increase in FY12 HVJ-DVPL blended tariff: The recently changed tariff will be valid for one year, after which the Board will fix the tariff for the next five years based on actual parameters. Led by tariff revision, we are increasing our FY11 and FY12 EPS estimates 6% and 18% to Rs 29.2 and Rs 34.1, respectively. Our revised SOTP-based target price for GAIL is Rs 515 (earlier Rs 485) (including investment value of Rs 49/share and E&P value of Rs 23/share). We believe there is further upside potential of at least Rs 27/share from its CGD (City Gas Distribution) foray. Adjusted for investments, the stock trades at 9.8x FY12E EPS of Rs 34.1. we recommend a Buy.

We expect GAIL’s transmission volumes to grow by 18% CAGR to 208 mmscmd by FY14, driven by a spurt in domestic gas volumes from RIL’s KG-D6, ONGC, GSPC’s KG basin block, and Petronet Dahej Terminal (RLNG) expansion. Currently, the volumes transported stand at 115 mmscmd and are likely to increase to 120 mmscmd in April 2010 and 130 mmscmd in October 2010. Of the estimated 60 mmscmd gas production from RIL’s KG-D6 block, GAIL currently transmits ~32 mmscmd (53% of the total). As RIL is slated to increase production, we have also built higher volumes for GAIL in our estimates. We currently build average gas transmission volumes of 130 mmscmd in FY11 and 152 mmscmd in FY12 as against actual volume of 107 mmscmd in FY10.

GAIL is working on three new 64 mmscmd cross-country pipelines: (1) Kochi-Mangalore-Bangalore, (2) Jagdishpur-Haldia, and (3) Dabhol-Bangalore. Equipment orders have commenced for some sections and pipelines are likely to be completed by FY12. Commissioning of Jagdishpur-Haldia pipelines will be in sync with the Kakinada-Haldia pipeline by Reliance. GAIL’s Kochi-Mangalore-Bangalore pipeline is expected to be completed by FY12 to deliver LNG from the Kochi terminal. Petronet management has also emphasised that the Kochi LNG terminal project is on track. The tariff for these pipelines based on the estimated capex is likely to be in the range of Rs 1,600-2,000/mscm.

Key assumptions: We have built gas transmission volume growth of 18% CAGR to 208 mmscmd by FY14. We have not factored in any meaningful capacity increase for GAIL’s LPG production and transmission business, and have built in conservative price realisations. We factor in upstream subsidy sharing at 90% of the auto fuel under-recoveries in our assumptions. We estimate that the share of gas transmission business (annuity type earnings) in total EBIT will be more than 65%, implying high quality of earnings.

Revising target price to Rs 515; maintain Buy: Led by tariff revision, we are increasing our FY11 and FY12 EPS estimates 6% and 18% to Rs 29.2 and Rs 34.1, respectively. Our revised SOTP-based target price for GAIL is Rs 515 (earlier Rs485) (including investment value of Rs49/share and E&P value of Rs23/share).

We believe that there is further upside potential of at least Rs 27/share from its CGD foray. Adjusted for investments, the stock trades at 9.8x FY12E EPS of Rs 34.1. Buy....

Source: Financial Express

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