New Delhi, March 13 India's city gas distribution (CGD) industry could see its daily sales volumes decline by 8-10 per cent in the near term as the ongoing conflict in West Asia disrupts natural gas supplies, according to a report by Crisil Ratings.
The disruption has primarily affected imports of liquefied natural gas (LNG), which account for around 40 per cent of the industry's gas requirement, with the rest sourced domestically.
The conflict has doubled global LNG rates.
"Nevertheless, the ability to pass on price increases to end-customers will cushion the profitability of CGD players. Liquidity buffers, support from strong sponsors, and moderate leverage are likely to support the credit profiles of CGD players. However, prolonged uncertainty in the Middle East will remain a concern," it said.
Crisil's analysis of seven CGD companies, which account for about 70 per cent of the industry's sales volume last fiscal, indicates that the industrial and commercial piped natural gas segment will bear the brunt of the supply squeeze due to its heavy reliance on imported LNG.
The industry's other two segments - compressed natural gas (CNG) used in vehicles and piped natural gas for domestic households (PNG-D) - together account for around 70 per cent of sales volumes and are expected to remain relatively insulated because their supply is largely met through domestic gas.
The government has also designated these segments as high-priority sectors for natural gas allocation under the Essential Commodities Act, 1955, through a notification issued on March 9.
"The conflict has squeezed imports. Qatar, which accounts for 45 per cent of India's liquefied natural gas (LNG) imports, has declared force majeure on international deliveries following a halt in production at its Ras Laffan facility on account of disruptions in the region.
"This has triggered a domino effect across the Indian gas value chain with several major gas traders invoking force majeure due to their inability to secure scheduled cargoes," Crisil said.
Industrial and commercial users of piped natural gas, who contribute 30 per cent to the total sales volume, are expected to be affected the most due to its high dependence on imported gas.
"The industry's daily sales volume is expected to decline by 8-10 per cent primarily due to curtailment of natural gas supply to industrial and commercial customers," said Ankit Hakhu, Director, Crisil Ratings.
This is despite likely government support to CGD companies to reduce curtailment to these customers from the current level of 40-50 per cent.
"Meanwhile, Indian gas traders are seeking alternative sources to offset reduced LNG supply. However, limited excess supply in the export market and elevated spot prices pose a challenge," he said.
LNG facilities of key exporters are operating at 90-95 per cent capacity (224 million tonnes per annum), leaving limited room for additional global supply (10-20 million tonnes) to offset the absence of Qatar's 77-80 million tonnes of annual export volumes, if the situation prolongs, he added.
Spot LNG prices in Asia have also surged to about USD 19-20 per million British thermal unit, up from USD 10-11 per mmBtu in February, potentially raising input costs for CGD companies supplying the industrial and commercial segment.
However, Crisil said CGD players typically have the ability to pass on higher costs to end consumers, which should help protect operating margins.
While operating margins are expected to remain largely stable, operating cash accruals may moderate due to lower volumes, said Gauri Gupta, Team Leader, Crisil Ratings.
She added that the sector's strong balance sheets and liquidity buffers should support credit profiles despite the disruption.
According to Crisil, the industry’s debt-to-EBITDA ratio is expected to remain around 1 this fiscal, supported by several large players being debt-free and by staggered capital expenditure and repayment schedules.
Liquidity levels covering more than nine months of debt servicing, along with support from financially strong sponsors, are expected to help companies withstand short-term shocks.
Crisil said the extent of impact will depend on how long the Middle East disruption continues, along with global LNG price trends and possible government measures to manage domestic gas allocation.