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GAIL (India) (GAIL)
Energy
Tariff cut for DUPL/DPPL pipelines. We find the tariffs recommended by the
Petroleum and Natural Gas Regulatory Board (PNGRB) for GAIL’s Dahej-Uran
(DUPL)/Dabhol-Panvel (DPPL) pipelines as being moderately higher (+12%) than our
computations. However, we go by the workings of the regulator and fine-tune our
earnings and fair valuations to factor in tariffs finalized by PNGRB. We maintain our
ADD rating with a target price of `510.
Tariff for DUPL and DPPL finalized at `24.49/ mn BTU (12% higher versus expectation)
The PNGRB has recommended a levelized tariff of `24.49/mn BTU (`0.89/cu m) for the extant
DUPL/DPPL pipeline system versus our assumption of `0.80/cu m and current tariff of `0.95/cu m.
GAIL had submitted a computation of tariff of `40.16/mn BTU. However, the tariff was revised
downwards to reflect (1) lower volumes, (2) lower maintenance capex, (3) higher operating days
and (4) lower inflation. We highlight that the tariff is effective from November 20, 2008.
Amendment to PNGRB Act clarifies adjustment to tariffs on variance in actual/normative volumes
We highlight that an amendment to the PNGRB Act notified in December 2010 lays down the
methodology for adjustment to the pipeline tariffs if the actual volumes are different from the
normative volumes submitted at the time of finalization of original tariff. As per the amendment,
the tariffs will be adjusted downward if the actual volumes are higher than the normative tariffs.
However, if the actual volumes are lower than the normative volumes, a set-off shall be allowed
against higher volumes (versus normative), if any. However, the set-off will be allowed only for the
first five years of operations.
Valuations attractive but risks from an unfavorable subsidy-sharing arrangement remain
We maintain our ADD rating on GAIL with a SOTP-based target price of `510 noting that the
stock offers 16% potential upside from current levels. We do not rule out risk to earnings from a
potential unfavorable subsidy-sharing arrangement. We highlight that GAIL sells 1.8 mn tons of
LPG, polymers and petrochemicals per annum, which is lower than its likely share of underrecoveries in product-equivalent terms. We note that GAIL can theoretically bear a maximum of
2.1% of the gross under-recoveries (1.8 mn tons/87 mn tons of consumption of regulated
products) in FY2012E (see Exhibit 1). GAIL’s share of under-recoveries among upstream companies
in 9MFY11 was 7.7% or 2.6% of gross under-recoveries.
Fine-tuned earnings and fair valuations
We have revised FY2011E, FY2012E and FY2013E EPS to `28.9, `34.7 and `43.6 from `28.4,
`34.8 and `43.6 to reflect new tariffs for the DUPL and DVPL pipelines.
Key points in tariff computation
` Date of applicability. The provisional levelized tariff of `24.49/mn BTU is applicable with
effect from November 20, 2008 (date of notification of regulations). The difference
between the actual tariff charged till date and that approved by the regulator will be
adjusted retrospectively with the customers. We believe GAIL would be making a one-off
provision of around `875 mn to account for the retrospective applicability of the new
tariff (GAIL’s existing levelized tariff for DUPL/DPPL was `26.14/mn BTU).
` Net fixed assets. GAIL has considered net fixed assets at `15.75 bn as of March 31 2008.
It has also included `5.11 bn incurred as additional expenditure incurred in FY2009.
` Modifications by the regulator. PNGRB has made the following modifications to the
data submitted by GAIL in determining the tariff for its DUPL/DPPL pipelines (see Exhibit 2).
These are similar to the modifications made by the regulator while determining the tariffs
for GAIL’s HVJ pipeline
ƒ Maintenance capex at 70% of submitted data. PNGRB has allowed maintenance
capex for 70% of the claimed amount and will review the same when details of the
actual expenditure are available at the time of tariff review.
ƒ Disallowance for unaccounted gas. The data submitted by GAIL considered
unaccounted gas at 0.6% based on their internal technical assessment. However,
the regulator has disallowed the same given (1) regulations have so specific provision
for the same and (2) the pipeline design system is completely welded, which would
result in minimal loss.
ƒ Operating days. PNGRB has assumed 355 operating days as opposed to GAIL’s
submission of 345 operating days.
ƒ Inflation assumptions. PNGRB has considered inflation at 4.5% versus GAIL’s
assumption of 5%.
GAIL's earnings may be at risk at higher crude oil prices and current subsidy-sharing arrangement
GAIL’s share of subsidy burden and sale of oil-linked products, March fiscal year-end, 2012E (` bn)
Consumption of regulated products (mn tons)
Estimated consumption of diesel 64
Estimated consumption of LPG 14
Estimated consumption of kerosene 9
Total consumption of regulated products (A) 87
Sale volumes of products linked to crude oil prices (mn tons)
GAIL's sales volumes of LPG and petrochemicals (B) 1.8
Theoretical maximum share that can be borne (%)
GAIL [(B)/(A)] 2.1
Actual subsidy borne in 9MFY11 (%)
GAIL 2.6
Source: Kotak Institutional Equities estimates
Cut in DUPL/DPPL pipeline tariffs
DUPL/DPPL pipeline tariff computation (`/mn BTU)
Levelized tariffs proposed by GAIL 40.16
Moderations/reductions by PNGRB
Lower inflation of 4.5% against 5% (0.58)
Unaccounted gas not allowed (2.89)
Higher no. of operating days at 355 days (1.04)
Volumes considered as per regulations (10.72)
Corporate FBT disallowed (0.04)
O&M capex reduced to 70% (0.12)
Others (0.28)
Total moderations/reductions (15.67)
Levelized tariff computed by PNGRB 24.49
Existing levelized tariff 26.14
Source: PNGRB, Kotak Institutional Equities
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GAIL (India) (GAIL)
Energy
Tariff cut for DUPL/DPPL pipelines. We find the tariffs recommended by the
Petroleum and Natural Gas Regulatory Board (PNGRB) for GAIL’s Dahej-Uran
(DUPL)/Dabhol-Panvel (DPPL) pipelines as being moderately higher (+12%) than our
computations. However, we go by the workings of the regulator and fine-tune our
earnings and fair valuations to factor in tariffs finalized by PNGRB. We maintain our
ADD rating with a target price of `510.
Tariff for DUPL and DPPL finalized at `24.49/ mn BTU (12% higher versus expectation)
The PNGRB has recommended a levelized tariff of `24.49/mn BTU (`0.89/cu m) for the extant
DUPL/DPPL pipeline system versus our assumption of `0.80/cu m and current tariff of `0.95/cu m.
GAIL had submitted a computation of tariff of `40.16/mn BTU. However, the tariff was revised
downwards to reflect (1) lower volumes, (2) lower maintenance capex, (3) higher operating days
and (4) lower inflation. We highlight that the tariff is effective from November 20, 2008.
Amendment to PNGRB Act clarifies adjustment to tariffs on variance in actual/normative volumes
We highlight that an amendment to the PNGRB Act notified in December 2010 lays down the
methodology for adjustment to the pipeline tariffs if the actual volumes are different from the
normative volumes submitted at the time of finalization of original tariff. As per the amendment,
the tariffs will be adjusted downward if the actual volumes are higher than the normative tariffs.
However, if the actual volumes are lower than the normative volumes, a set-off shall be allowed
against higher volumes (versus normative), if any. However, the set-off will be allowed only for the
first five years of operations.
Valuations attractive but risks from an unfavorable subsidy-sharing arrangement remain
We maintain our ADD rating on GAIL with a SOTP-based target price of `510 noting that the
stock offers 16% potential upside from current levels. We do not rule out risk to earnings from a
potential unfavorable subsidy-sharing arrangement. We highlight that GAIL sells 1.8 mn tons of
LPG, polymers and petrochemicals per annum, which is lower than its likely share of underrecoveries in product-equivalent terms. We note that GAIL can theoretically bear a maximum of
2.1% of the gross under-recoveries (1.8 mn tons/87 mn tons of consumption of regulated
products) in FY2012E (see Exhibit 1). GAIL’s share of under-recoveries among upstream companies
in 9MFY11 was 7.7% or 2.6% of gross under-recoveries.
Fine-tuned earnings and fair valuations
We have revised FY2011E, FY2012E and FY2013E EPS to `28.9, `34.7 and `43.6 from `28.4,
`34.8 and `43.6 to reflect new tariffs for the DUPL and DVPL pipelines.
Key points in tariff computation
` Date of applicability. The provisional levelized tariff of `24.49/mn BTU is applicable with
effect from November 20, 2008 (date of notification of regulations). The difference
between the actual tariff charged till date and that approved by the regulator will be
adjusted retrospectively with the customers. We believe GAIL would be making a one-off
provision of around `875 mn to account for the retrospective applicability of the new
tariff (GAIL’s existing levelized tariff for DUPL/DPPL was `26.14/mn BTU).
` Net fixed assets. GAIL has considered net fixed assets at `15.75 bn as of March 31 2008.
It has also included `5.11 bn incurred as additional expenditure incurred in FY2009.
` Modifications by the regulator. PNGRB has made the following modifications to the
data submitted by GAIL in determining the tariff for its DUPL/DPPL pipelines (see Exhibit 2).
These are similar to the modifications made by the regulator while determining the tariffs
for GAIL’s HVJ pipeline
ƒ Maintenance capex at 70% of submitted data. PNGRB has allowed maintenance
capex for 70% of the claimed amount and will review the same when details of the
actual expenditure are available at the time of tariff review.
ƒ Disallowance for unaccounted gas. The data submitted by GAIL considered
unaccounted gas at 0.6% based on their internal technical assessment. However,
the regulator has disallowed the same given (1) regulations have so specific provision
for the same and (2) the pipeline design system is completely welded, which would
result in minimal loss.
ƒ Operating days. PNGRB has assumed 355 operating days as opposed to GAIL’s
submission of 345 operating days.
ƒ Inflation assumptions. PNGRB has considered inflation at 4.5% versus GAIL’s
assumption of 5%.
GAIL's earnings may be at risk at higher crude oil prices and current subsidy-sharing arrangement
GAIL’s share of subsidy burden and sale of oil-linked products, March fiscal year-end, 2012E (` bn)
Consumption of regulated products (mn tons)
Estimated consumption of diesel 64
Estimated consumption of LPG 14
Estimated consumption of kerosene 9
Total consumption of regulated products (A) 87
Sale volumes of products linked to crude oil prices (mn tons)
GAIL's sales volumes of LPG and petrochemicals (B) 1.8
Theoretical maximum share that can be borne (%)
GAIL [(B)/(A)] 2.1
Actual subsidy borne in 9MFY11 (%)
GAIL 2.6
Source: Kotak Institutional Equities estimates
Cut in DUPL/DPPL pipeline tariffs
DUPL/DPPL pipeline tariff computation (`/mn BTU)
Levelized tariffs proposed by GAIL 40.16
Moderations/reductions by PNGRB
Lower inflation of 4.5% against 5% (0.58)
Unaccounted gas not allowed (2.89)
Higher no. of operating days at 355 days (1.04)
Volumes considered as per regulations (10.72)
Corporate FBT disallowed (0.04)
O&M capex reduced to 70% (0.12)
Others (0.28)
Total moderations/reductions (15.67)
Levelized tariff computed by PNGRB 24.49
Existing levelized tariff 26.14
Source: PNGRB, Kotak Institutional Equities
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