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GAIL: Regulator’s unified tariff plan fires up GAIL stock

The Petroleum and Natural Gas Regulatory Board’s (PNGRB) proposal for unified gas tariff may have led to the 8% rally in gas distributor GAIL India’s shares on Friday.

The tariff proposed in the board’s consultation document on `unified pipeline tariff ‘ is 60% higher than the average tariff earned by GAIL last fiscal.

Analysts said if the proposal is accepted, GAIL’s earnings could see a 35-45% increase and a re-rating in the stock could be in the offing. Gujarat State Petronet, which operates gas networks in Gujarat, is also expected to benefit from the proposed tariff hike.

By the end of the trading session, shares of GAIL India had pared gains to close 5.79% higher on the BSE at `419.10. Gujarat State Petronet closed nearly 3% higher at `200.15. On the Nifty, GAIL was the biggest gainer in percentage terms.

“This is a positive development for GAIL. It could lead to a re-rating if expected transportation tariff hikes are implemented with possibly a 10-12% upside in its share price from current closing price,“ said Deepak Jasani, head of retail research at HDFC Securities.

Analysts said a `3-4 increase in earnings per share for GAIL is possible if the proposal is accepted. “If most of the recommendations are accepted, then GAIL’s earnings per share from transmission would improve by `12.7. Every `10 mmBtu increase in weighted average or pooled tariff improves GAIL’s earnings per share by `4,“ said Gagan Dixit, analyst at Elara Securities, in a note.

A unified pipeline tariff would entail pooling of capital expenditure and operating expenditure across various pipelines and allocating this sum over the total gas volumes. Currently , tariff is calculated over individual pipelines, and if capital expenditure is high, the pipeline’s tariff is high despite low volumes of gas being transported. Hence, the move is expected to bring parity to the price of gas across networks.

Analysts said the move could make gas transmission cost feasible for new pipeline users and help develop gas markets in new geographies like the north eastern parts of India.

Currently , the blended realisation of GAIL is `37mmBtu and the company has proposed unified tariffs of `57mmBtu for its network. Kotak Securities, in a note, said the implementation of a unified tariff will be a significantly positive for GAIL, as it will result in higher tariff realisation on existing pipelines, better returns on new investments, and encourage overall consumption of gas.

However, Jasani of HDFC said investors should be aware of other concerns with GAIL’s business before assigning a premium to shares based on the current development, “There are other considerations, such as gas pricesgas marketing margins, company’s LPGpetrochemicals business and investment value unlocking, which also need to be tracked for any negative developments. So it may not be wise to be very bullish on this stock based on this development alone till the actual quantum of tariff hike is known.“

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