The ongoing 9th round of auction of city gas distribution (CGD) licences is set to alter the industry landscape with the government expecting investments of Rs 70,000 crore from winning bidders, or four times the cumulative Rs 15,000-18,000 crore invested till fiscal 2018.
On offer are 86 geographical areas (GAs) in 174 districts covering 29% of India’s population, compared with a cumulative 56 GAs awarded in the previous 8 rounds in the past 10 years. The new GAs on offer include Chennai, Coimbatore, Visakhapatnam, Aurangabad and Bhopal, which have good demand potential.
CRISIL expects the 9th round to receive way better response than before because of revised bidding norms, and the push from the government through favourable policies. These include marketing exclusivity period of 8 years (extendable by 2 years, compared with 5 years earlier), tariff floors to discourage unviable bids, removal of additional bid bond requirement and evaluation of bids based on higher infrastructure creation.
Since CGD businesses in large cities are more profitable, licences for them are expected to draw greater bidding interest. Bidders are also expected to favour GAs adjacent to existing pipeline networks. Increased participation from public sector oil majors is likely given the government impetus and higher weightage given to number of new domestic connections in the bidding criteria.
“We expect greater participation as the 9th round auction has put a cap on the performance bank guarantee (PBG) amount,” said Sachin Gupta, Senior Director, CRISIL Ratings. “In the earlier rounds, the PBG amount became the winning stroke.”
Only large companies could offer high PBG, which touched as much as 4 times the project cost. What’s more, in case of a tie in scores between the bidding entities, the entity that submitted the higher additional bid bond was declared the successful bidder.
In terms of gas allocation, too, the CGD players find favour. For example, in the past two years, while India imported ~45% of its natural gas requirement, the allocation to CGD (for both domestic and CNG segments) got the first priority.
CRISIL-rated companies control about half of the GAs already awarded, and their credit profiles remain healthy. In the past two fiscals, their sales volume has grown 8% annually. Leverage is comfortable at less than 0.8x, and operating profitability healthy with margins at ~24%.
Such healthy operating profitability and low leverage have resulted in strong interest coverage and return ratios. The average return on capital employed of the CRISIL-rated companies is ~20%.
“However,” says Nitesh Jain, Director, CRISIL Ratings, “pace of execution, prudence in bidding and support from sponsors will be the monitorables as these would decide whether the credit profiles sustain in the road ahead.”