PNGRB’s tariff hikes for GAIL’s 4 pipelines (18% of gas transmission volumes) were much anticipated and will increase blended tariff for its gas transmission business by 15% y-o-y in FY19. We expect tariff hikes for HVJ-DVPL, DVPL II and Mumbai pipelines (65% of gas transmission volumes) to be awarded in H2FY19. GAIL witnessed many positives in the quarter — higher crude price helping trading (US LNG benefit), LPG price rise and low risk of outright unbundling. We expect the streak to continue as commodity prices rise further, petchem utilisation improves, gas-based fertiliser plants commission and CGD flourishes.
PNGRB hiked tariffs for GAIL’s four pipelines — mainly DUPL/DPPL pipeline (13% of gas transmission volumes) got a 54% tariff hike, part of Gujarat Pipeline Network (4% of gas transmission volumes) got 235% hike and Agartala pipeline (~1% of gas transmission volumes) got 690% hike. The hikes will be applicable for FY19 in full. Following this, we expect a 20% tariff hike for HVJ-DVPL, DVPL II and Mumbai pipelines (65% of gas transmission volumes) to be awarded in H2FY19, implying a 13% y-o-y further increase in blended tariff for FY20. Brent crude price remain elevated at >$80/bbl on supply concerns due to US sanctions on Iran.
GAIL earlier pointed that a crude price of >$60/bl is positive for its HH-linked US LNG imports. We see the positive streak to continue for GAIL, as crude and LPG prices rise further, gas-based fertiliser plants (6 plants are on anvil) start getting commissioned from FY20 and as gas off-take increases from completion of JHDBL (Jagdishpur- Haldia and Dhamra-Bokaro) pipeline in North-East as well as from new Gas created out of the latest CGD bidding round.
We switch to SOTP-based valuation from DCF, given the volatility in commodity prices, INR/USD and timing uncertainty of volume growth in the medium-term for natural gas transmission and trading businesses, which make us less confident on long-term forecasts. We use Sept ’20 ebitda (average of FY20 and FY21E ebitda) of the segments to get to their respective EVs. Our new TP of Rs 440 (vs Rs 415 earlier) implies a 16% upside. We reiterate Buy.
Source: financialexpress.com