GAIL - Gas transmission double whammy... tariffs cut... volumes down... - IIFL

In line with the decline in domestic natural gas production, GAIL has seen a sharp deceleration in its natural gas transmission volumes from a peak of 120mmscmd in Q4 FY11 to 105mmscmd in Q3 FY13. Furthermore, PNGRB issued notification for its extant pipelines, whereby the tariffs were cut sharply. These factors have been a key contributor in the recent de-rating of the stock.

Robust medium term outlook for transmission volumes

While the volumes have seen weakness, we expect gradual increase from hereon in the medium term as KG-D6 marginal fields start production and Dabhol and Kochi LNG terminals get commissioned. Further with government looking keen to take steps to incentivize gas production and increasing gas prices, meaningful up tick in gas volumes could be seen from FY15 onwards. Additionally, major chunk of regulatory turbulence caused by PNGRB tariff cuts seems to be behind us, as the tariff have been regularized for ~80% of GAIL's pipelines.

Higher gas prices to impact petchem margins

The recent recommendations of Rangarajan committee of increasing the gas prices to ~$8/mmbtu levels have reportedly been accepted by the oil ministry and put up to cabinet for approval. In such a scenario GAIL's profitability in the petrochemical (Pata plant) and LPG segment would be affected. We estimate ~2-3% decline in earnings for every $1/mmbtu rise in gas price.

Pipeline and petchem expansions to benefit beyond FY15

GAIL has lined up a capex of Rs184bn between FY13 and FY15 to expand its capacities. 36% of the investments will be towards expanding existing and laying new pipelines, while 16% will be spent for increasing petrochemical manufacturing capacity. While Rs81bn would be raised to fund part capex, rest would be met through internal accruals. Most of these investments will start generating revenues only beyond FY15.

Source : Equity Bulls

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