In context of competitiveness and infrastructure improvement, the sales volume of City Gas Distribution (CGD) to surge to 18-20% this fiscal year

According to a CRISIL report, City Gas Distribution (CGD) sales volume is projected to be up by 18–20% this fiscal year compared to an unfavorable run the previous fiscal year. This is caused by two factors: supply-side pressure from ongoing distribution infrastructure expansion and demand pulls from better domestic petrol pricing competitiveness when compared to alternative fuels as a result of declining petrol prices. It further stated that operating margin will increase as a result of lower procurement costs and greater fixed cost absorption brought on by increased volume, both of which will strengthen distributors' credit quality.

To arrive at the results, CRISIL Ratings evaluated nine distributors with a market share of less than 90% for the fiscal year 2023. It stated that because it affects distributors' ability to compete with other fuels, changes in gasoline prices are an important operational factor. This consequently affects their growth in volume.

The previous fiscal year saw a roughly 200% increase in Administered Pricing Mechanism (APM)-based and worldwide petrol prices, respectively, year over year (y-o-y) due to supply-chain disruptions and strong demand in the west after the conflict between Russia and Ukraine. The peak prices of APM and international gas were US$ 8.57 per Metric Million British thermal units (MMBtu) and around US$ 40 (MMBtu), respectively. The research stated that this had an effect on the volume sold to companies that mostly use imported natural gas because APM gas is not permitted for use in industrial settings, as well as Compressed Natural Gas (CNG) stations that use APM gas.

Reduced competitiveness with other fuels caused CNG volume growth to decline (from 45% in fiscal 2022 to ~30% in the most recent fiscal year). The effect was much more pronounced for piped natural gas for industrial use (PNG-I), where the price decline of industrial LPG and propane caused a decline in volume. It is currently anticipated that this will turn around.

According to Mr. Ankit Hakhu, Director, CRRISIL Ratings, this fiscal year, prices have begun to decline for two reasons. One is the application of the Kirit Parikh Committee's recommendations, which place a fiscal year-long cap on APM prices at US$ 6.5/MMBtu, notwithstanding an increase in the price of crude oil globally. Two, due to milder winters in Europe and the US, improved storage stocks, and a slowdown in industrial expansion, average international petrol prices are predicted to stay low (around US$ 10-15 per MMBtu this fiscal year, compared to an average of US$ 27 previous fiscal year). This August, international prices have already adjusted to about US$ 12.5.

According to the CRISIL analysis, lower petrol prices will encourage demand growth and assist CNG firms restore their pricing competitiveness versus alternative fuels to levels observed before the last fiscal year, or roughly 35–40%. This fiscal year, CNG car sales have already increased by almost 35% year over year. Furthermore, the sustainability of volume increase will be further enhanced by ongoing infrastructural development.

Mr. Ankush Tyagi, Associate Director, CRISIL Ratings stated that at the beginning of current fiscal year, the number of CNG stations had increased by about 28% year over year. This will give volume a boost. Additionally, there has been a 20% increase in home and industrial connections, which will help to fuel the expansion of domestic and industrial natural gas. In general, we anticipate that CGD volume will increase by 18–20% this fiscal year, with CNG and home PNG expanding by 18–23% and the industrial segment by 10–15%.

Increased volume and declining input costs will help the operating margin rebound from the previous two fiscal years' Rs. 6.5–7.0 (US$ 0.08-0.08) per Standard Cubic Metre (SCM) to Rs. 8–10 (US$ 0.09-0.12) per SCM. Improved cash accrual would benefit distributors, who plan to invest over Rs. 90,000 crore (US$ 10.82 billion) in capital projects over the next four fiscal years. Therefore, even though debt will rise, the debt to cash flow (EBITDA) ratio will stay steady and stay between 1.0 and 1.3 times for this fiscal year and ~0.8 times for the previous fiscal year. In the years to come, geopolitical changes, their effects on energy prices, and their competitiveness against alternative fuels will be closely monitored.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.