GAIL earnings estimates increased by analysts after pipeline tariff hike

The new tariff for GAIL would be Rs 58.61 per metric million British thermal units (mmBtu), which is 45 percent higher than the current tariff, and will come into effect on April 1, 2023.

Analysts raised their EBITDA (earnings before interest, taxes, depreciation, and amortisation) estimates for GAIL (India) after the oil sector regulator increased the pipeline tariff for the company by 45 percent.

However, analysts pointed out that though the move was positive for GAIL, the tariff was along expected lines.

The new tariff for GAIL would be Rs 58.61 per metric million British thermal units (mmBtu), which is 45 percent higher than the current tariff, and will come into effect on April 1, 2023, according to a Petroleum and Natural Gas Regulatory Board (PNGRB) notification on March 22.

PNGRB had proposed a 41-percent increase in unified tariff at Rs 60.92 per mmBtu for the state-owned gas distribution company on March 3. GAIL had sought an integrated tariff of Rs 68 per mmBtu.

The oil sector regulator then held an open house session inviting stakeholder comments regarding GAIL’s unified pipeline tariff of GAIL.

“Surely a positive for GAIL. However, the hike was already factored in by the street when PNGRB first proposed the changes,” said an analyst with a domestic brokerage firm who did not wish to be identified.

GAIL shares fell 0.4 percent to Rs 105.05 at the close on the BSE on March 23.

Earnings expectations

“As a result of the tariff hike, we increase our EBITDA estimate (excluding other income) for FY24 to Rs 134b from Rs 116b previously,” Motilal Oswal said in a report. “Similarly, we raise our FY24 EPS estimate by 16% to Rs 14.4 from Rs 12.4 previously.”

The hike was warranted due to changes proposed by the PNGRB last year – ramp-up of utilisation, allowing recovery of system usage gas, and transmission losses, said Motilal Oswal.

Analysts also expect the company’s petrochem segment to perform better due to the tariff hike and the recent decline in LNG prices.

“Management has also cited a favourable scenario currently with lower LNG prices, better gas availability, and petchem recovery. We have taken a 30% hike on FY22 book tariff for FY24, not assuming a staggered increase (as no update on the same has come yet), and consequently have revised our FY24 EPS by 5%,” Emkay said in a report.

Spot LNG prices have almost halved to $14 per mmBtu due to a milder winter and relatively high inventory levels in Europe. This compares to a recent high of $45 per mmBtu.

Analysts said the hike in tariffs won’t have a major impact on users.

“It is slightly negative for city gas distribution companies that use the pipeline network. However, they should be able to fully pass through the price increase to end customers,” said the analyst who did not wish to be identified.