Markets

GAIL proposes, regulator disposes, street worries

ET Intelligence Group: GAIL (India), the countrys largest gas transmission company, lost over onetenth of its market capitalisation on Thursday after the industry regulator raised gas tariffs far below the analysts expectations.

The gas transportation tariff under the new norms of the Petroleum and Natural Gas Regulatory Board (PNGRB) will increase by 4 per cent for its most significant pipeline for FY20, compared with the Streets expectation of a 15-20 per cent hike.

The lower-than-expected tariff hike will translate into 4-8 per cent earnings downgrade for the current fiscal. The company derives about onethird of the operating profit and 45 per cent of the sum of part valuation from the gas transmission segment. The other segments include petrochemicals, LPG production and transportation and natural gas marketing.

The gas regulator has computed tariff of the old Hazira-Vijaipur-Jagdishpur (HVJ) pipeline and new HVJ pipeline on an integrated basis, which means it has considered both the pipelines as one unit.

The tariff is calculated based on capacity utilisation, capital expenditure, inflation and economic life in such a way that the pipeline earns a post-tax return of 12 per cent and pre-tax return of 18 per cent. The procedure uses a discounted cash flow model to arrive at the gas transmission tariff.

The old and new HVJ are parallel pipelines and account for nearly 60 per cent of the gas transmission volume of GAIL. Historically, the regulator has been computing the tariff of both the pipelines separately. The gas tariff of the old HVJ and new HVJ were Rs 25.46 and Rs 53.65 per MMBtu, respectively, under the old method of tariff calculation.

GAIL had sought tariffs of Rs 114 and Rs 79 per MMBtu for old and new HVJ respectively. However, PNGRB approved lower tariffs of Rs 43.7 for the old pipeline and Rs 56.7 for the new one. On an integrated basis, the approved tariff for the pipeline is Rs 41.1 per MMBtu.

The key reason for the tariff hike being lower than Street expectation is the economic life of the pipelines under the integrated tariff regime, which has been extended to March 2035 from March 2032.

The higher economic life has resulted in a relatively lower integrated gas tariff on account of the increase in the number of years in the discounted caRead More – Source