Gujarat Petronet Downgraded After Regulator Board Cuts Pipeline Transmission Tariff

The Petroleum and Natural Gas Regulatory Board cut the pressure transmission tariff on Gujarat State Petronet's key Gujarat pipeline network by 47%. The authorised tariff stands at Rs 18.1 per million metric British thermal unit, compared to the Rs 34 per million metric British thermal unit sought by the company, leading key brokerages to downgrade the company's rating.

The tariff order issued by the regulatory board outlines the prices that Gujarat State Petronet can charge for transporting natural gas through its pipeline network.

The regulatory board's decision could significantly affect India's natural gas market.

While it could lead to lower prices for consumers of natural gas as well as for industries that use natural gas as a feedstock, it could also put pressure on Gujarat State Petronet's profits.

The key reason why the tariff cut implemented was largely different from what the company sought was because of the difference in assumptions made by regulatory board.

In its tariff filing, Gujarat State Petronet claimed a total ongoing future capital expenditure of Rs 3,400 crore. This is consistent with the PNGRB's expectation of a future capex outflow of Rs 3,400 crore.

The difference is on the back of a major cut in the company's last-mile connectivity capex, which refers to the final leg of delivering natural gas from pipelines to end users like homes and factories.

According to the gas regulator, last-mile connectivity capex should be negligible as most of the country now has City Gas Distribution licences, which means that Gujarat State Petronet does not need to spend as much money on building the connections themselves.

The regulatory board approved future operating expenditure of Rs 2,600 crore, compared to Rs 5,000 crore claimed by Gujarat State Petronet.

This was primarily due to the regulator's assumption that selling unit gate, or SUG, costs and transmission losses are much lower. SUG costs refer to the cost of buying natural gas at the city gate, which is the point where it enters the city distribution network. Transmission loss is the natural gas lost during transportation due to factors like pipeline friction.

Furthermore, Gujarat Gas Petronet assumed a gas price of $12.01 per million metric British thermal unit for FY24 with an annual escalation of 4.5%. In contrast, the regulatory board has considered a gas price of $11.0/8.8 per million metric British thermal unit in FY24/25 and $7.6 from FY26.

The Petroleum and Natural Gas Board's future gas volumes are 22% higher than Gujarat State Petronet's assumptions.

The company's future volume assumption stood at 26 million metric standard cubic metres per day, while the regulatory board has assumed volumes at 31.7 million metric standard cubic metres per day.

The volume divisor assumed by the board is 85–94% of the revised pipeline capacity, compared to the past practice of taking values at 75% of capacity.

Here's what brokerages have to say about the company:

• Downgraded Gujarat State Petronet's rating to 'reduce' from a 'buy' earlier, with a target price of Rs 320 apiece.

• Authorised tariff cut below estimates

• Cut FY25/26 Ebitda estimates by 37%/42%

• Cuts FY25/26 EPS estimates by 34%/40%

• PNGRB's approved capex/ opex was 45%/49% lower than GSPL’s claim.

• Tariff to be reviewed next fiscal if actual volumes show considerable variation

• Lower spot LNG prices may keep transmission volumes favourable in the near term.

• Downgrades Gujarat State Petronet to 'reduce' with a fair value of Rs 360 apiece. 

• The approved tariff is 64% lower than the Rs 51/mmbtu tariff sought by company.

• Believe that a 20–30% tariff cut was due to higher actual volumes.

• Expect Gujarat State Petronet to challenge PNGRB's latest order.

• Cut FY25/26 earnings estimates by 28%/37%.

• Expect return on capital employed to decline sharply to 11-12%, compared to the average 24% over FY19-23