Hike In Pipeline Tariffs To Boost GAIL’s Earnings But…
The PNGRB has approved a single tariff for the integrated Hazira-Vijaipur-Jagdishpur network after GAIL’s submission.
GAIL (India) Ltd. will benefit from the tariff hike for its gas pipeline network, however, the earnings gain may not be as much as the India’s largest gas company had anticipated.
The Petroleum & Natural Gas Regulatory Board approved an integrated tariff rate for two of the key pipelines managed by GAIL. While the new rate is 18 percent higher than the previous, it’s nearly 58 percent lower than what the gas producer had asked.
The PNGRB has approved a single tariff for the integrated Hazira-Vijaipur-Jagdishpur network after GAIL’s submission. Earlier, the gas producer charged Rs 25.46 per mBtu to those who have been the users of its pipeline since November 2008 and Rs 53.65 per mBtu to users starting March 2010, equating to an integrated tariff of Rs 34.7 per mmBtu. This has now been hiked to Rs 41.11 per mmBtu.
The new prices will be applicable from April 1, 2019 and the next review of these prices will happen after three years. The old and new Hazira-Vijaipur-Jagdishpur pipelines accounts for nearly 60 percent of the total gas transmission volumes.
The reason behind the lower rate may be deviations seen in GAIL’s tariff submission which include lower operating cost, gas loss, higher volume divisors, number of working days and life of asset.
The hike in tariff rates was expected to provide a boost to the stock that’s been struggling due to the overhang of falling gas prices in the Asian market. The lower price of liquefied natural gas made it difficult for the gas distributor to sell the commodity at a profit in the domestic market.
Most brokerages viewed the development negatively. CLSA said the higher life of asset could be the reason behind the lower tariff hikes. The foreign brokerage downgraded its stock rating for GAIL and lowered the EPS estimates by 4 percent and 7 percent for FY20 and FY21.
Goldman Sachs also expects market to react negatively to the lower tariff hike.
While Nomura too is disappointed by the lower tariffs, it said GAIL’s decision to seek one integrated tariff for HVJ network has a negative outcome. According to the brokerage, for the integrated tariff to be revenue neutral, the rate should have been around Rs 50/mmBtu.
The hike will increase the cost of manufacturing urea and petrochemicals where gas is used as a feedstock. Also, the prices of compressed and piped natural gas for retail customers could go up. The price hike will put pressure on the margin of the power sector and sponge iron makers where gas is used to generate energy.