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Positive for GAIL; status quo for GSPL for the time being

* According to the amendments brought in late-2022, the Petroleum and Natural Gas Regulatory Board (PNGRB) set up an Industry Committee for determining unified tariff across entities.

* This proposal builds in INR60.9/mmBtu as integrated tariff for GAIL against its own proposal of INR68/mmBtu; the current implied tariff is at ~INR43/mmBtu (9MFY23).

* The move towards unified tariff is much awaited as it would reduce the tariffs for upcoming pipelines, thus facilitating more capex in pipelines.

* We will not revise our forecasts until the time tariffs are finalized for GAIL & GSPL. However, considering the recent positive developments around GAIL, we raise our TP to INR127. The assumption of INR60.9/mmBtu would raise our EPS for GAIL to INR15.1 from INR12.4 and target price to INR152.

PNGRB proposes unified tariff across entities

* PNGRB constituted an Industry Committee for determining unified tariff across entities. The committee has proposed tariffs of INR35.3/INR78.5/INR104.6 per mmBtu across Zones 1/2/3, respectively.

* This builds in INR60.9/mmBtu for the integrated network of GAIL. To keep things in perspective, GAIL had proposed an integrated tariff of INR68/mmBtu v/s ~INR43/mmBtu, which it is realizing as of now.

* The hike is warranted due to the changes proposed by PNGRB last year - ramp up of utilization, allowing recovery of system usage gas and transmission losses. The open house for unified tariff is to be held on 23rd Mar’23 post which, PNGRB would come out with its final order.

Positive for GAIL, status quo for GSPL

* Decline in LNG prices would be a boon for GAIL. We expect its transmission volume to rise to 119mmscmd in FY24 from 107mmscmd in FY23. We understand that the petrochemical plant is also likely to achieve full utilization in a day or two.

* GAIL is trading at 8.5x FY24E EPS of INR12.4 and 5.2x FY24E EV/EBITDA. We value the company at 9x adjusted EPS and add the value of investments to arrive at a target price of INR127. We will not revise our forecasts until the time the tariffs are finalized for GAIL and GSPL. However, if the proposed tariff of INR60.9/mmBtu is accepted, our target price for GAIL would rise to INR152.

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

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