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PNGRB has announced GAIL’s integrated tariff involving 10 connected pipelines at Rs58.61/MMBtu vs. Rs68.55 filed by the company and expectations ranging from at least Rs50 to Rs61/mmbtu (based on unified excel). Take or pay adjustments in FY23 and exclusion and overlap of certain pipelines have impacted book-level revisions, but by GAIL’s own admission, the weighted average tariff is Rs44/MMBtu; hence, this hike is ~33% for the integrated network. We believe, on a blended basis, it is ~30% ex-take or pay. In an analyst meet post the tariff order, management sounded content with the hike, though it may be looking at appealing PNGRB’s assumption of lower gas prices (awaiting approval of Kirit Parikh recos) and higher capacity. The hike would amount to Rs20bn+ of annual EBITDA gain. Management has also cited a favorable scenario currently with lower LNG prices, better gas availability, and petchem recovery. We have taken a 30% hike on FY22 book tariff for FY24, not assuming a staggered increase (as no update on the same has come yet), and consequently have revised our FY24E EPS by 5%. Our FY23E EBITDA/PAT is up 2%/7% from petchem normalcy and lower tax rate, while our FY25 earnings remain unchanged. GAIL is favorably placed, though the recent stock outperformance prices in most positives. Thus, we downgrade our rating from Buy to Hold, keeping FY25 based TP unchanged at Rs115/sh – although if gas price and capacity appeals are accepted, another 10% tariff hike can accrue (~Rs65/mmbtu), which along with better gas marketing margins (we have built in ~Rs25bn EBITDA) are upside risks (TP goes up by 10% to ~Rs125).

Lower gas prices and loss lead to cut vs. filed rate: PNGRB has shaved off Rs5.8/MMBtu from Rs68.6/MMBtu, assuming lower APM and HP-HT gas prices at USD3.6/MMBtu and USD7/MMBtu vs. USD7.5/MMBtu and USD15.5/MMBtu taken by GAIL. While GAIL had incorporated Kirit Parikh Committee’s recos, PNGRB is awaiting a final decision on the same. Additionally, Rs1.2-1.5/MMBtu each has been cut on account of capex, volume-capacity, and pay revision. In capacity, PNGRB has assumed a higher number for JHBDPL and Gujarat besides a few additional tie-ins. The revised tariff would come into effect from April 1, 2023, wherein it will be included in the unified tariff as per our understanding.

Management exudes a positive outlook in the analyst meet: GAIL is contented with the hike, though it will look to appeal against the gas price and capacity assumptions. It expects Rs20bn+ of revenue accretion p.a. The next review should ideally be after 3 years now, though the inclusion of KMBPL and BGPL can add to the integrated rate. Transmission volumes should reach 120mmscmd by FY24 and, thereafter, post a 5% CAGR. In gas marketing, management indicated Rs35bn EBITDA in FY24, as seen from FY23 run rate, despite being an adverse year. Based on current prices and gas cost, petchem should be near the green zone. It aims to sell US LNG in India; the five-year 0.5mmtpa Shell contract overseas would be expiring soon.

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