Following a reduction in allocation under the Administered Price Mechanism (APM), the gas procurement cost of city gas distribution (CGD) companies is set to increase by Rs 2-3 per kilogram (kg). These companies get priority gas allocation at reduced prices under APM from legacy gas fields for the domestic compressed natural gas (CNG) and piped natural gas (PNG) – domestic segments.
According to recent public announcements by these companies, GAIL (India) Ltd has reduced the APM gas allocation for the CNG segment by around 20 per cent of their CNG requirement, effective October 16, 2024. It is worth noting that APM allocation for CGD players will now be reduced to approximately 50 per cent of their CNG requirement, from the allocation level of around 70 per cent this fiscal year so far.
As a result, in order to maintain adequate supply, the CGD players will need to procure gas from costlier sources such as domestic high pressure, high temperature (HPHT) gas fields or imported liquefied natural gas (LNG).
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Ankit Hakhu, Director, CRISIL Ratings, said, “Against the current APM gas prices of $6.5 per metric million British thermal unit (MMBtu), HPHT gas prices are $9.5 per MMBtu and LNG prices are $11-12 per MMBtu. This means the cost of input gas for the CNG segment of CGD players is likely to increase by Rs 3.5-4.5 per kg. However, given that the share of CNG in the overall CGD segment is around 60 per cent, the overall cost of gas procurement may rise by Rs 2-3 per kg for industry players.”
Now in order to maintain profit margins, players are likely to pass through the increased cost to consumers by increasing the selling price of CNG, although in a gradual manner in the coming months. Some players have already undertaken partial increases in CNG prices.
The trend, CRISIL said, has been demonstrated in past years as well, including fiscal 2023, when gas prices had shot up amid geopolitical crisis in the wake of the Russia-Ukraine conflict. However, these hikes were partial and have also witnessed some lag effects.
Ankush Tyagi, Associate Director, CRISIL Ratings, said, “Despite the expected increase in prices, the competitiveness of CNG as a transportation fuel over alternatives such as petrol or diesel will remain healthy at ~25 per cent against ~30 per cent prior to the price hike. This should limit any material impact of the price hike on volume growth of CNG sales over the medium term. Further, the likely pass through of cost increase will support operating profitability and in turn the credit profiles of CGD players.”
According to a CRISIL Ratings analysis of rated CGD players, annual debt service coverage ratio is expected to be healthy at more than 1.5 times for fiscals 2025 and 2026. The credit profiles of CGD players will also be supported by the staggered nature of annual capital expenditure and debt repayments over the medium term.
Besides, any potential reduction in excise duty on gas could result in a lower-than-expected price hike and will bear watching, it concluded.
From: financialexpress
Financial News
