City gas distributors (CGD) are expected to see their operating margins recover to more than ₹7.2 per standard cubic metre (scm) in the current financial year, according to Crisil Ratings.
The ratings agency projects margins in the range of ₹7.2–₹7.5/scm, an increase of 8–12 per cent from the second half of the previous fiscal, when a steep drop hit companies in the administered price mechanism (APM) gas allocation for the compressed natural gas segment.
Margins had fallen because distributors were forced to source costlier spot gas to meet supply requirements. Crisil noted that companies have since shifted to contracted supplies, improving price predictability and reducing exposure to volatile spot markets.
“Against the 30 per cent reduction in APM allocation for the CNG segment, CGD companies got 15-20 per cent long-term allocations from domestic new well gas, mainly towards the end of last fiscal or early this fiscal. For the balance, they have signed additional medium- and long-term contracts, mainly for HPHT gas and R-LNG. This will not only improve gas security but also reduce exposure to the spot market, where prices are 25- 30 per cent higher on average. Consequently, the overall procurement cost for CGD companies will be ~5 per cent lower this fiscal compared with the second half of last fiscal,” said Ankit Hakhu, Director.Higher operating expenses will offset some of the gains from lower gas procurement costs, as companies continue to expand infrastructure in existing and new geographical areas to support demand.
In the second half of the last fiscal, APM gas allocated to the CNG segment was reduced to less than 40 per cent of the total CNG requirement, compared with ~70 per cent in the first half of the last fiscal. This led to a substantial increase in gas procurement costs, as companies relied on spot purchases that were 80-100 per cent more expensive than under APM prices to protect against supply disruptions.
As a result, spot purchases by volume rose to more than 15 per cent of total supplies from ~5 per cent in the first half of the last fiscal.
“The reduced procurement cost and steady realisation should take operating profit back to ₹7.2–7.5/SCM this fiscal—levels seen prior to the APM cut—from ~₹6.7/SCM in the second half of last fiscal,” said Ankush Tyagi, Associate Director, Crisil Ratings.
“The CGD sector should see healthy volume growth of 8-10 per cent this fiscal, following a ~15 per cent on-year growth last fiscal, driven by increasing CGD infrastructure, healthy cost competitiveness—CNG5 remains 20–40 per cent cheaper than petrol or diesel—and potential demand boost from the reduction in the goods and services tax rates on automobiles,” Tyagi added.
