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Gas utilities. We have a Hold on the segment, preferring GAIL, Gujarat State Petronet (GSP) to Petronet LNG (PLNG)

Gas consumption in India’s energy mix is expected to be 15% by 2030. The fall in crude and gas prices has been a boon for energy consumption in India. We believe gas demand in the country will be strong over FY23-25, supported by strong gas infrastructure with GAIL/GSPL in transmission and PLNG the low-cost LNG re-gasifier. Demand is still strong across sectors. CGD would lead, with the country’s gas consumption rising ~100mmscmd by 2030. We initiate coverage with Holds on GAIL (TP: Rs117) and GSP (TP: Rs308), and maintain a Hold on PLNG (TP: Rs240).

GAIL India’s transmission tariff hike to drive earnings, to bring ~60% to EBITDA. The integrated tariff provided by PNGRB is Rs58.61/mBtu, ~33% higher than the FY22 blended tariff of Rs44.2, and will be effective from FY24. The additional transmission volume growth would come from JHDBPL, new fertiliser plants and KG basin. EBITDA would register a 24.5% CAGR over FY23-25 with 37.9% gas transmission growth, while gas trading would report lower EBITDA than in FY22 and FY23. Petchem performance, which was weak in FY23, would improve by FY25 given the fall in gas prices.

GSP’s transmission volume recovery, the key trigger. Volumes fell more than 7mmscmd, most from CGD – GUJGA on weaker industrial demand amid higher gas prices impacting other sector demand, especially power. The tariff revision is expected soon but the new regulations have been positive for GSP, though the higher contribution to the TP comes from its investment in GUJGA.

Sensitivity. GAIL’s EBITDA sensitivity to Rs0.2/scm change in transmission tariff is Rs8.4bn. For a $0.2/mBtu change in the weighted average gas price in the natural gas trading business, EBITDA moves Rs22.5bn. GSP’s EBITDA sensitivity to a Rs0.2/scm change in the transmission tariff is Rs2.6bn.

Valuation. At CMPs, GAIL (excl. investments) trades at 5.3x FY25e EV/EBITDA and 0.8x P/BV and GSP (excl. investments) at 3.2x FY25e EV/EBITDA and 0.5x P/BV. Risks: Changes in government regulation
policies, smaller hikes in natural gas transmission tariffs, steep movement in LNG, crude and PE prices, slower execution of pipeline expansion plans, slowdown of demand and high capex spends not resulting in good returns.

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