A hike of 40-50% in HVJ tariff looks likely; it will provide an upside of 7-11% to FY20F EPS and fair value
The final tariff determination process for GAIL’s HVJ (Hazira-Vijaipur-Jagdishpur) – GREP-DVPL and DVPL/GREP networks (HVJ upgrade) is now in the final stages. These networks account for
72-73% of GAIL’s transmission volume, and thus are key to GAIL’s transmission earnings. We expect the regulator to decide one integrated tariff (vs separate tariffs earlier). Based on recent final tariff orders for seven pipelines, we think that a tariff hike of 40-50% looks likely.
Our current FY20F estimates assume an overall transmission tariff increase of 25%. With a sharp tariff 54% increase in DUPL’s tariffs, GAIL’s tariffs have already increased by 12% in 1HFY19. Even if GAIL gets only a 30% increase in integrated HVJ tariff, we see upside to our estimates. At a 40-50% tariff increase, we see 7-11% upside to our FY20F EPS and fair value. GAIL (Buy, TP Rs 460) is our top pick in India oil & gas.
Final tariff seems likely in December or early 2019
The initial provisional tariff for these networks was decided in April, 2010, and the final tariff was to be determined by 2011. As provisional tariffs were lower (then prevailing tariffs), domestic gas volumes had sharply declined, and also due to higher costs, GAIL’s average post-tax ROCE on integrated HVJ has been only about 8% vs 12% mandated by tariff regulations. The final tariff decision, and a large tariff hike (final tariff will also need to compensate for past under-recoveries), was long over-due.
With a progressive regulator now in place, the process seems now fast-tracked. After completion of the 9th city gas distribution (CGD) licensing round in August this year, the regulator’s focus is on deciding pipeline tariffs. On 27 Sep-2018, regulator PNGRB (Petroleum and Natural Gas Regulatory Board) had decided a final tariff for seven pipeline networks. For HVJ/HVJ upgrade networks, and also for the JHBDPL (Jagdishpur – Haldia – Bokaro – Dhamra pipeline) network, the regulator had web-hosted public consultation documents (PCDs) on 18 Oct-2018.
On the key issue of an integrated tariff (or separate tariff, as earlier), PNGRB had asked for GAIL’s input by 27 Nov-2018. GAIL’s input has also been web-hosted, and GAIL has strongly advocated for an integrated tariff. The regulator has now asked for stakeholders’ comments on an integrated network within the next 10 days. The regulator has also asked for GAIL’s response on extending the life of the HVJ network by 10 years, and also its views on considering the economic life of the pipeline as 30 years (current practice of 25 years). In our view, the above timeline indicates that the final tariff determination process has now been fast-tracked. The regulator also said recently that it will decide all pipeline tariffs by end-December.