CGD, fertilisers to drive demand for domestic natural gas: CRISIL

The city gas distribution (CGD) and fertilisers sectors will continue to helm demand for domestic natural gas in India and lift its consumption by 3.5-4.5 per cent in fiscal year 2023. The CGD demand will grow 12-13 per cent and that of fertilisers by 8-9 per cent. Together, these two sectors account for 55 per cent of the total gas consumption in the country.

The growth is in line with the government’s target to increase the share of natural gas in its energy mix to 15 per cent by 2030 as part of its environmental commitments, from 6.5 per cent at the end of fiscal year 2022.

With India’s gross domestic product (GDP) expected to grow 6 per cent in fiscal year 2024, domestic gas demand is likely to rise 8-10 per cent. Improved pace of economic activity and personal mobility will lead to healthy growth in segments such as CGD. Also, with improved demand for petroleum products, demand from refineries and petrochemicals is expected to rise.

Implementation of Parikh panel suggestions

Domestic gas prices have risen a steep 213 per cent so far in fiscal 2023, primarily due to a sharp increase in global hub prices amid low inventory and an energy crisis in Europe.

Spot LNG prices shot up over 3x last fiscal to $21 per mmBtu due to healthy demand from Asia and Europe, and supply constraints. For fiscal 2023, CRISIL Research has projected spot LNG prices to rise a further 35-40 per cent to $27-32 per mmBtu on average as the Russia-Ukraine conflict is expected to continue, with major impact on the global gas sector.

In the case of contracted liquefied natural gas (LNG), prices followed those of crude oil last fiscal year, rising a significant 63 per cent to $10.1 per mmBtu. In fiscal 2023, with crude oil prices averaging $93-98 per barrel, contracted LNG prices are expected to average $13-14 per mmBtu.

In fiscal 2024, if the Parikh Committee recommendations on capping of prices are implemented, domestic gas prices could come down, providing immediate relief to end-use sectors. With crude oil prices expected to moderate by 15 per cent in fiscal 2024, the contracted LNG price is likely to decline to $11-13 per mmBtu on average. Spot LNG prices, however, are likely to remain volatile and stay above $20 per mmBtu owing to geopolitical events, considering European injection demand, rebound in Chinese demand and uncertainty over Russian supplies.

Credit profiles of CGD firms

Healthy double-digit demand growth outlook for next fiscal and monopolistic sales model in geographical areas of operations will continue to support the business strength of CGD companies. Further, operating efficiency, measured in terms of sustaining or improving the operating profits by optimising the volume and price mix, is largely intact and without significant impact on ROCE.

Healthy operating performance and modular nature of capex will lend stability to the credit metrics of companies in the CGD space over the near to medium term.

For the fertiliser industry, while the demand outlook is favourable, companies have witnessed a build-up in subsidy receivables resulting in higher working capital requirement. Further, the subsidy for this fiscal could likely be Rs 40,000 crore short in case additional subsidy is not announced. Therefore, any delay in increased allocation and timely disbursement would lead to further build-up of receivables and could moderate the credit metrics of fertiliser makers.

Recession fears

In fiscal 2022, a combination of gradual demand pickup due to Covid-19 vaccination rollout, restricted supply, reducing inventory levels, and increase in alternative fuel prices drove crude oil prices higher to $80 per barrel.

In the first half of fiscal 2023, along with improving demand, the Russia-Ukraine conflict pushed prices up significantly to around $106 per barrel on average.

With the crisis yet to reach a conclusion, the uncertainty over changing demand-supply dynamics amid the ban on Russian oil is now believed to have settled, resulting in easing of fears caused over trade and availability of crude oil. Bearing these in mind, CRISIL Research believes crude oil prices will settle between $93 and $98 per barrel in fiscal 2023, a growth of almost 18-20 per cent over last year.

In fiscal 2024, crude oil prices are expected to decline by 15% to average $80-85 per barrel, due to weaker economic conditions globally. The decision of the OPEC+ to cut production, coupled with the impact of price cap on Russian crude oil, will remain a key monitorable.

Demand for petroleum products

Demand for petroleum products declined from historical highs to log a de-growth of 9.3 per cent in fiscal 2021 owing to Covid-19 related disruptions. The following fiscal, easing of restrictions post-pandemic resulted in 5 per cent growth.

In the current fiscal, growth in demand for petroleum products should sustain at 5-7 per cent, led by growth in economic activity. Consumption is expected to hit the pre-Covid-19 level of 213-218 million metric tonne. In the seven months through November this fiscal, demand for petroleum products improved 12 per cent on a lower base of the previous year because of the second wave of Covid-19. The road transportation segment, which accounts for over 50 per cent of domestic petroleum product consumption, witnessed healthy recovery, with a 17 per cent consumption growth.

Next fiscal, the incremental growth in consumption is expected to moderate in key segments. Consumption growth of motor spirit (petrol) is likely to moderate because of increasing fuel efficiency and deepening penetration in the two-wheeler segment, while that for high-speed diesel is likely to moderate due to a slowdown in industrial activity, eventually impacting the average kilometres travelled by commercial vehicles.

Credit profile of oil refiners and marketers

The demand for petroleum products next fiscal year is expected to be higher than the pre-pandemic levels. This coupled with expected decline in crude oil prices will not only aid profitability of the players but will also bring down their working capital requirement.

Therefore, key credit metrics such as the interest cover ratio as well as gearing will improve marginally and shall remain within comfortable range during the period through next fiscal. Further, the healthy balance sheets of these companies combined with the expected healthy operating performance will lend stability to the overall debt metrics of the sector over the near to medium term despite increase in capex intensity. Additionally, the ratings factor in support from the government owing to the latter’s majority ownership and sector’s criticality to the economy.

As a result, the credit profiles of oil refiners and OMCs will remain stable over the near-to-medium term, indicates an analysis of public sector refineries and OMCs, which have 65 per cent share of refining capacity and 90 per cent share of oil marketing in India.