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Pipeline tariffs see massive cuts

Revised pipeline tariff announced: Sharp 47% cut for GUJS 

The Petroleum & Natural Gas Regulatory Board (PNGRB, India’s gas regulator) has cut tariff for Gujarat State Petronet’ (GUJS IN) high-pressure pipeline by 47% to INR 18/mmbtu. Pipeline carries ~90% of GUJS' gas transmission volume. This was due to: 1) the extension of pipeline life by six years till FY32, 2) increase in pipeline network capacity by ~6mmscmd to 36mmscmd, resulting in higher volume denominator in tariff calculation, and 3) hit from prospective implementation for higher gas volume in FY19-23 (at ~32mmscmd) versus 26mmscmd mentioned in prior FY19 tariff filing, thus, higher FY19-23 earnings would be accordingly adjusted in future earnings (downwards). The revised tariff would be effective 1 May 2024. With a 47% reduction in pipeline tariff, we pare our FY25E/26E EPS 53%/56% to INR 7.5/INR 8.1, respectively. Consequently, we pare GUJS’ TP to INR 292/share from INR 386/share, implying a 23% downside from the CMP.

Disallowance of INR 15bn future capex primarily led to tariff cut

Per tariff filing, GUJS assumed an INR 34bn future capex for its tariff submission, while the PNGRB considered only INR 18bn, which contributed to a decline of INR 13.8/mmbtu in tariff. PNGRB has assumed a lower future capex, mainly due to non-consideration of INR 9bn last-mile connectivity capex. This the regulator may consider in the future as and when GUJS incurs actual capex.

We pare FY25E/26E EPS 53%/56%

After incorporating the negative impact from the sharp 47% reduction in tariff for GUJS’ high-pressure pipeline, we decreases FY25E and FY26E EPS by 53% and 56% to INR 7.5 and INR 8.1, respectively.

Valuation: Downgrade to SELL; TP pared to INR 292

We downgrade GUJS to SELL from Accumulate and lower our TP to INR 292 from INR 386 on DCF with 11.1% WACC (from 11.0%). We arrive at a pipeline transmission network value of INR 134/share (from previous INR 228/share) for GUJS.

Also, we assume: 1) gas volume CAGR of 7% through FY24-29E and 5% through FY29-42E and 2) Gujarat Gas (GUJGA IN) stake value at INR 112/share on 70% discount over CMP.

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