Sales volume of city gas – comprising compressed natural gas, or CNG used by vehicles, and piped natural gas, or PNG used by homes and industries – is set to soar 25-27% this fiscal, driven by rebounding vehicular mobility and industrial activity, and a record price advantage versus competing fuels such as petrol, diesel and furnace oil.

Such strong growth will help city gas distributors sustain robust operating margins of ~28%, even as higher prices of liquefied natural gas (LNG) gets partly absorbed to cushion the impact on consumers. That, and strong balance sheets, will support stable credit profiles of distributors.

Last fiscal saw city gas volume contract 13% as both demand for CNG and industrial PNG, which together contribute 90% of total city gas consumption, were hard hit by the pandemic, especially in the first quarter, before recovering.

Says Manish Gupta, Senior Director, CRISIL Ratings, “The first quarter of this fiscal, unlike last year, saw far less impact of lockdowns on vehicular mobility and industrial activities as volumes were up 130% on-year though down 18% sequentially. We expect sustained recovery for the rest of the year, as both CNG and industrial PNG demand improve on a combination of higher economic activity and record price advantage against alternate fuels. This will drive overall demand by 25-27% this fiscal, even 8% above fiscal 2020 levels.”

Sales volume of CNG, which accounts for about 40% of total consumption, will be driven by an expanding network of CNG stations (up from 2,500 in May 2020 to 3,180 in May 2021) and higher sale of factory-fitted CNG cars. Sales of CNG cars are expected to increase 50% to 2.6 lakh units this fiscal given their lower total cost of ownership than competing petrol and diesel ones.

Demand for industrial PNG, which accounts for around 50% of total consumption, will benefit from improving competitiveness against crude-linked industrial fuels this fiscal, a select ban on sale of polluting fuels such as furnace oil and pet coke, an expanding pipeline network, and hassle-free use.

Residential PNG, which accounts for the balance 10% of consumption, too, will continue to grow steadily this fiscal with consumers shifting away from LPG to PNG due to its lower cost, increasing network and higher safety.

Importantly, the all-time-high price advantage of gas against alternative fuels will provide a fillip to volumes.

Says Naveen Vaidyanathan, Associate Director, CRISIL Ratings, “Beginning this fiscal, successive price hike moves have increased petrol and diesel prices by 14-16%, with petrol prices over Rs 100 per litre mark across the country.¹ Meanwhile, CNG price, driven by the domestic administered pricing mechanism formula², is at an all-time low and expected to be only 4-6% higher on-year. LNG prices have spiked, but still trail the rise in crude oil linked industrial fuel prices. This has resulted in a record price advantage of 61-69% for CNG versus petrol and diesel, and a 14-21% for PNG versus industrial fuels”. (see annexure)

The increase in LNG means operators would absorb a part of the price increase. However, the higher volume will still support a stable operating margin of ~28% this fiscal. Last fiscal, despite volume contraction, margin scaled to an all-time high of 28.5%, as companies benefited from multi-year low input gas prices, which were not fully passed on.

Apart from steady margins, robust balance sheets (with debt/Ebitda of 0.3x and cash of Rs 4,600 crore as on March 31, 2021) would continue to support the credit profiles of city gas operators, shows a CRISIL Ratings study of five city gas distributors³, which account for almost three-fourths of industry volume.

That said, another wave of the Covid-19 pandemic, not currently anticipated, or any adverse change in regulations, which have so far been a tailwind, would bear watching going ahead.

¹ Based on average pump prices in four metro cities – Mumbai, Delhi, Chennai and Kolkata
² Ministry of Petroleum and Natural Gas sets the domestic administered gas prices based on international gas prices at major trading hubs
³ Gujarat Gas, Indraprastha Gas, Mahanagar Gas, Maharashtra Natural Gas and Adani Total Gas