City gas sales volume to rise 25-27% this fiscal on dearer petrol, diesel : CRISIL
City gas sales – which include compressed natural gas, or CNG, used in vehicles and piped natural gas, or PNG, used in homes and industries – are expected to increase by 25-27% this fiscal year, owing to rebounding vehicular mobility and industrial activity, as well as a record price advantage over competing fuels such as gasoline, diesel, and furnace oil.
This rapid expansion would enable city gas distributors to maintain healthy operating margins of 28%, even if increased liquefied natural gas (LNG) prices are partially absorbed to mitigate the impact on consumers. This, together with healthy financial sheets, will help distributors maintain stable credit profiles.
City gas usage fell 13% last fiscal year as both CNG and industrial PNG demand, which together account for 90% of total city gas use, were heavily hurt by the pandemic, particularly in the first quarter, before recovering.
According to Manish Gupta, Senior Director, CRISIL Ratings, "Unlike last year, the first quarter of this fiscal showed far less impact from lockdowns on vehicle mobility and industrial activity, with volumes increasing 130% year on year but falling 18% sequentially." We anticipate a steady rebound for the remainder of the year, as demand for CNG and industrial PNG improves as a result of increased economic activity and a record price advantage over other fuels. This will increase overall demand by 25–27% this fiscal year, and even by 8% over fiscal 2020 levels.”
CNG sales, which currently account for around 40% of overall consumption, will be boosted by an increasing network of CNG stations (from 2,500 in May 2020 to 3,180 in May 2021) and increased sales of factory-fitted CNG vehicles. CNG vehicle sales are likely to climb 50% to 2.6 lakh units this fiscal year, owing to their lower total cost of ownership compared to gasoline and diesel vehicles.
Industrial PNG demand, which accounts for approximately 50% of total consumption, will benefit this fiscal year from increased competitiveness against crude-linked industrial fuels, a selective ban on the sale of polluting fuels such as furnace oil and pet coke, an expanding pipeline network, and hassle-free use.
Residential PNG usage, which accounts for the remaining 10% of demand, will also continue to grow gradually this fiscal year, as consumers switch from LPG to PNG due to its cheaper cost, expanding network, and increased safety.
Notably, the all-time-high price advantage of natural gas over other fuels will bolster volumes.
According to Naveen Vaidyanathan, Associate Director at CRISIL Ratings, "Successive price hikes have increased petrol and diesel costs by 14-16% since the start of this fiscal, with petrol prices above the Rs 100 per litre threshold across the country."
Meanwhile, the price of compressed natural gas, which is determined by the domestically regulated pricing mechanism formula, is at an all-time low and is predicted to increase by only 4-6% year on year. LNG costs have increased significantly, but continue to lag behind the rise in crude oil-linked industrial fuel prices. This has resulted in a record price differential of 61-69% between CNG and petrol and diesel, and a 14-21% differential between PNG and industrial fuels”. (refer to annexure)
Due to the increase in LNG prices, operators will absorb a portion of the increase. However, the increased volume will enable the company to maintain a constant operating margin of 28% this fiscal year. Despite volume reduction, margins increased to a record high of 28.5% last fiscal year, as businesses benefited from multi-year low input gas prices that were not fully passed on.
Apart from stable margins, robust balance sheets (debt/Ebitda of 0.3x and cash of Rs 4,600 crore as of March 31, 2021) would continue to bolster city gas operators' credit profiles, according to a CRISIL Ratings study of five city gas distributors3, which account for nearly three-fourths of industry volume.
Having said that, another wave of the Covid-19 epidemic, which is not currently predicted, or any detrimental change in regulations, which have been a tailwind thus far, are worth monitoring in the coming months.