Unified tariff proposed for developing national gas grid...
…further comments invited to determine tariff for zone one
* The Petroleum and Natural Gas Board (PNGRB) has published yet another draft notification, this time for determining the natural gas pipeline unified tariff.
* PNGRB has asked stakeholders for their views on determining the tariff for zone one – which shall be a percentage of the second tariff zone. The Open House to be conducted on 23rd Oct, post which the final notification would be released.
* In various instances, PNGRB has reiterated that it is working toward streamlining the tariff regulation for trunk pipelines in the country.
* As a general guidance, PNGRB has shown the order of magnitude for unified tariff based on FY20 data as per the excel sheet uploaded on its website. Following the same workings, our preliminary calculations suggest that the unified tariff of INR56.8/mmbtu is higher by 15%/48% to implied tariff of GAIL/GSPL respectively.
* We maintain Buy on GSPL and GAIL.
Cynosures of the drafts are as follows…
1. The unified tariff shall be determined and approved by the board every calendar fortnight (1st and 16th of every month).
2. Each pipeline entity shall provide to the board fortnightly information in respect of actual volumes. Such information shall be electronically uploaded by the entity on the platform every fortnight and also sent via email to the board within two days from the end of each fortnight.
3. The first 300km of the pipeline is defined as the first tariff zone for the unified tariff. The remaining length of the national grid system is defined as the second zone for the unified tariff. The length of the spur line shall not be counted for the purpose of determining the tariff zones for the unified tariff.
4. The unified tariff is the weighted average of approved zonal tariffs (denominated in INR/mmbtu and excluding statutory taxes and levies) in respect of the pipelines forming part of the national gas grid system (refer to Exhibit 4). This is considering the quantity of gas transported and quantity of ship or pay.
5. The unified tariff applicable for a fortnight shall be web-hosted by the board on its website within five (5) days from the end of the previous fortnight.
Huge boost to GAIL and GSPL
* We believe stringent directives by the NGT, along with the government’s aggressive push to increase gas in the total energy mix to 15% by 2030, would lead to various avenues for growth for gas in the country. Although, the proliferation of the national gas pipeline across the country remains key to achieving the stated objectives.
* The recently launched gas exchange also requires gas swapping to facilitate cheaper/economical gas access to the end consumer. Thus, it becomes all the more crucial to make gas accessible to various parts of the country.
* We believe the unified tariff would eventually encourage new pipeline developments in the country, thereby increasing gas distributors’ access to a arger pool of consumers. This would boost gas demand in the longer run, along with fulfilling the Government of India’s plan to expand gas pipeline infrastructure to ~32,000km over the next few years from 17,000km currently.
* Also, India’s domestic LNG import capacity is likely to expand to ~60mtpa over next 4-5 years, from 42.5mtpa currently, in line with increasing domestic gas consumption.
We delineate various pipeline projects currently in development by GSPL and GAIL, as follows (along with valuation and view):
* Maintain Buy on GSPL (TP: INR300) – The proposed tariff of INR56.8/mmbtu is higher by 48% to implied tariff of INR38.5/mmbtu as per our preliminary calculation (refer to Exhibit 2).
* The company has already received approval from PNGRB to develop connectivity for an upcoming RLNG terminal at Chhara. It is also working on trunk pipeline projects such as Mehsana–Bhatinda and Mallawaram– Bhilwada.
* The company currently has total pipeline capacity of ~42mmscmd (v/s ~38mmscmd of volumes in FY20). Also, considering huge potential to carry an additional 15.5mmtpa of gas on its grid from expansion – addition of LNG terminal, (i.e. ~56mmscmd v/s current yearly volumes of ~40-42mmscmd), capex is inevitable.
* The stock trades at 10.2x FY22 EPS of INR19.9 and 5.4x FY22 EV/EBITDA, at a ~50% discount to its last five-year EPS average.
* GSPL’s investment in GUJGA and Sabarmati Gas constitutes ~70% of its CMP, implying 3x FY22E P/E for the standalone.
* Maintain Buy on GAIL (TP: INR150) – The proposed tariff of INR56.8/mmbtu is higher by 15% to implied tariff of INR49.4/mmbtu.
* Phase-1 of the 753km pipeline from Phulpur to Dobhi (connecting Gorakhpur, Patna, and Barauni) has already been commissioned, along with the six Geographical Areas (GAs) on this length.
* Phase-II of the 901km pipeline connecting Dobhi to Durgapur and Dhamra to Angul was expected to be completed by the end of the current calendar year, although a bit of delay may be expected due to COVID.
* Phase-III of the 1,001km pipeline from Bokaro–Angul and Durgapur–Kolkata was also expected to be completed by Dec’20. The Barauni–Guwahati pipeline of 716km is expected to be completed by Dec’21.
* We have been highlighting (in line with company guidance) how concerns surrounding US LNG would subside with the start of operations at the new fertilizer plants.
* Also, most potential users in the KG Basin are power plants, which may not be able to take the high cost gas of the KG Basin. Thus, even 70% routing of the KG Basin gas to western coast could boost GAIL’s transmission volumes by 29%.
* We continue to believe GAIL could clock a strong performance; we reiterate our Buy rating, with TP of INR150/share. Also, the stock is trading at 5.7x FY22 EPS of INR15.3 and 4.5x FY22 EV/EBITDA – a ~50% discount to its last five-year EPS average – which offers an excellent investment opportunity.
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