PNGRB’s tariff order increases the risk of lower returns for GAIL’s new pipelines

PNGRB’s tariff order increases the risk of lower returns for GAIL’s new pipelines

Mumbai: The Petroleum & Natural Gas Regulatory Board (PNGRB) tariff order on the Dadri-Bawana-Nangal gas pipeline network had little impact on the GAIL India stock. The stock lost just 1.4% since the PNGRB released the order on 12 July.

Against GAIL India’s tariff proposal of 27.7 per mmbtu, the gas regulator has approved an initial tariff of 11.85 per mmbtu for the pipeline. The differences in volume assumption and capital expenditure have led to a 57% deviation in tariff calculations.

The reduction in tariff has two adverse implications for the company. First, the company will have to account for lower returns from the pipeline project. According to analysts, the internal rate of return (IRR) from the pipeline could fall from a projected 18% to around 11%.

The order needs to be implemented retrospectively from January 2010, implying that the company will have to adjust the tariff difference with the customers. According to Antique Stock Broking, the company could take a hit of 80 crore in the current fiscal due to provisions and revenue loss.

Amit Rustagi and Sabri Hazarika of Antique Stock Broking said in a note “We estimate (Rs) INR8/mmbtu tariff cut assuming FY11/FY12 volumes at 1.0/3.9mmcmd which implies an INR500m (million) provision for the last two years. We assume 5mmcmd throughput for FY13e which would result in INR800m revenue impact. The impact on FY13e earnings would be INR0.7/sh (2% of FY13e EPS of INR29/sh)."

The other implication is the risk of more adverse tariff orders in future. Analysts worry that the regulator might not agree with the company’s assumptions for tariff calculations. Over the next one year, the company is expected to commission at least three more pipelines. With volumes remaining tepid (falling in some routes) and authorities taking regulated volumes into account, the risk of the company facing more such adverse orders is high.

Amit Rustagi and Sabri Hazarika of Antique Stock Broking add “Our channel checks with P&NGRB and GAIL suggest that lower actual volumes wouldn’t be used for future tariff computation. Pre-tax 18% project IRR for DBN pipeline on P&NGRB’s assumptions would fall to 11.5% assuming volumes at 4/5/5mmcmd for FY13e/FY14e/FY15e………, which is prone to further risks. We highlight similar risk for other projects like Dabhol-Bangalore, DVPL/GREP upgradation and Chainsa-Jhajjar-Hissar, all of which would be fully commissioned in FY13e."

Overall, the latest tariff order has further complicated things for the GAIL India. The company is in the midst of capacity expansion. With the volumes remaining subdued, unfavorable tariffs is the last thing the company wants at this stage.