IGI Logo

The PNGRB has approved the Second Amendment to the Natural Gas Pipeline Tariff Regulations, 2025. The amendment entails relief to far flung customers, especially CGDs, through zonal realignment, besides gas cost optimization and a development reserve for pipeline players. The unified tariff (UFT) for Zone 3 has been eliminated, with CNG and domestic PNG to come under Zone 1, irrespective of the distance from the gas source, and pipeline operators are mandated to procure 75% of their SUG (system use gas) through long-term contracts, thus boosting predictability and affordability for customers. Fifty percent of net tax earnings for pipelines above 75% utilization would be parked in a development reserve for future capex, while the other 50% would be passed on to customers via tariff adjustments vs 100% currently. In the listed universe, IGL seems to be the material beneficiary, as core NCR and northern GAs fall largely under Zone 2, and changing this to Zone 1 tariff can boost blended EBITDA/scm by ~10%, if retained. The uptick in Zone 1 tariff from this realignment can adversely impact MGL’s EBITDA/scm by 3-5%, while Gujarat Gas with a dominant I/CPNG portfolio would see negative impact, besides being largely in Zone 1. For GSPL, the pipeline development reserve would be beneficial, though its capex is low; hence, the impact may not be meaningful. GAIL management in the past has said that HVJ nearing 75% utilization will benefit in the future from this. We raise IGL’s earnings by 15-16% and TP by 9% to Rs230, building in Rs7/scm EBITDA now, in line with management guidance vs Rs6 earlier; retain ADD. We maintain earnings and TP and our BUY on MGL and our REDUCE on Gujarat Gas. We await more numerical details from the management and the PNGRB.

CGD priority sector zonal realignment to benefit IGL and far-flung CGDs

Currently, UFT for Zones 1/2/3 is Rs42/80/107 per mmbtu. In our O&G universe, IGL is largely in Zone 2, while Gujarat Gas and MGL are in Zone 1. As UFT is revenue-neutral for pipeline operators, the elimination of Zone 3 would increase Zone 1 and 2 rates, while shifting all CNG and DPNG to Zone 1 would further increase the rates. We await more details on this, though we believe Zone 1 rate could rise to ~Rs55/mmbtu while that for Zone 2 would be ~Rs85, assuming Zone 1 is 66% of Zone 2. At this rate, IGL/MGL—for which the priority sector is 81%/85% of total volumes—would see blended EBITDA/scm impact of +Rs0.7/-Rs0.4, which is ~10%/4% of the current assumed runrate. For Gujarat Gas, this could be ~10%. We await more details from companies and the PNGRB. We now assume Rs7/scm EBITDA for IGL, per management guidance, given there is enough room for this. However, with 20-25% of Oil India’s gas volumes being qualified as NWG following the DNPL common carrier, expected toward CY25-end, we expect further APM allocation cuts for the priority sector. For MGL/Gujarat Gas, we maintain our assumptions.

Gas pipeline development reserve sentimentally positive for GSPL and GAIL

GSPL with more than 75% pipeline utilization would benefit from this, though given the low capex runrate the impact may not be material. GAIL management also stated that HVJ, which is nearing 75% utilization, would see a positive effect of this amendment in the future; however, being part of the integrated network, it is challenging to calculate any impact. We retain our estimates, TP, and ratings on the two companies (GAIL: BUY; GSPL: ADD). For GAIL, the tariff hike is the key trigger being awaited.

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354