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PNGRB approves integrated tariff of INR58.6/mmBtu for GAIL

* PNGRB, in its tariff order dated 22nd Mar’23, has approved a levelized tariff of INR58.6/mmBtu for GAIL’s integrated natural gas pipeline (INGPL), effective 1st Apr’23. To give a perspective, GAIL had proposed an integrated tariff of INR68/mmBtu v/s ~INR43/mmBtu realized during 9MFY23.

* As a result of the tariff hike, we increase our EBITDA estimate (excluding other income) for FY24 to INR134b from INR116b previously. Similarly, we raise our FY24 EPS estimate by 16% to INR14.4 from INR12.4 previously.

* LNG prices have plummeted to ~USD12/mmBtu from the peak of USD54/mmBtu. This correction, combined with the recent ramp-up of PATA, should improve the petrochem segment’s performance. ? Owing to these positive factors, we reiterate our BUY rating on the stock. We value the stock at 9x adjusted FY25E EPS and add the value of investments to arrive at a TP of INR147, up from INR127 earlier.

Substantial improvement in transmission EBIDTA

* Earlier, during its committee proposal for a unified tariff across entities, PNGRB had proposed a tariff of INR60.9/mmBtu against GAIL’s proposal of INR68/mmBtu.The current notification of INR58.6/mmBtu is marginally lesser than that.

* The hike is warranted due to the changes proposed by the PNGRB last year – ramp-up of utilization, allowing recovery of system usage gas and transmission losses.

* Following the hike, we increase our EBITDA estimates for the transmission segment to INR76b/INR79b for FY24/FY25 from INR54b/INR55b previously

Stabilization in sight for petrochemical business

* Utilization at GAIL’s petrochemical plant has remained subdued at ~40-50% for the last three quarters due to supply disruptions from Gazprom and recordhigh spot LNG prices.

* However, spot LNG prices have now cooled off to ~USD12/mmBtu, down 77% from the peak of USD54/mmBtu seen in Aug’22, which should improve petrochem segment's performance.

* Additionally, GAIL has recently signed an MOU with Shell Energy India to explore prospects for importing important petrochemical precursors in a bid to diversify feedstock for its petrochemical plant.

Valuation and recommendation

* The decline in LNG prices is a boon for GAIL. We expect its transmission volume to rise to 117mmscmd in FY24 from 107mmscmd in FY23. We also understand that the petrochemical plant has already been ramped up to full utilization a few days back.

* GAIL is trading at 7.3x FY24E EPS of INR14.4 and 4.5x FY24E EV/EBITDA. We value the company at 9x adjusted FY25E EPS and add the value of investments to arrive at a TP of INR147. We maintain BUY on the stock.

* Key risks would be a rise in LNG prices and/or a poor economic outlook, which would affect natural gas demand.

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