Credit profile of CGD companies to improve post new price norms: report
4 min read . Updated: 12 Apr 2023, 08:34 PM IST
Premium- Ind-Ra expects the credit profile in the downstream segment to remain stable in FY24 on account likely sound refining margins
NEW DELHI : Credit profile of city gas distribution (CGD) companies is likely to improve going ahead with the new price norms and anticipated further policy changes, said a report by India Ratings and Research.
The rating agency has maintained a neutral outlook for oil and gas sector for FY24, driven by a stable demand for petroleum products, continued high crude and natural gas prices benefitting the upstream companies, an improvement in the credit profile of oil marketing companies (OMCs) on account of a reduction in the losses on the sale of primary fuels and high crack spreads, and a continued sound credit profile of city gas distribution (CGD) entities, backed by supportive regulatory policies.
Ind-Ra expects the credit profile in the downstream segment to remain stable in FY24 on account likely sound refining margins. Also, the credit profile of CGD companies is expected to improve in the year, driven by regulatory support and planned policy-level changes.
Furthermore, on account of the cabinet approval for Kirit Parikh Committee, the Administered Pricing Mechanism (APM) cost of gas for CGD segment will come down to around $6.5/metric million British thermal unit (MMBtu) from the current $8.57/MMBtu, driving EBITDA growth.
Standalone petrochemical players however could continue to face margin pressure as raw material prices will remain elevated, while end-product prices will remain dependent on a global demand pick-up.
The rating agency expects gross refining margins to moderate in FY24 from highs seen in 1QFY23, while remaining healthy, led by the oil supply chain realignment forced by geopolitical events.
Ind-Ra estimates the benchmark Singapore gross refining margins to have remained above USD10/bbl for FY23, driven by high crack spreads on account of a rapid demand recovery post covid-led demand destruction. OPEC has announced production cuts which could keep crude prices elevated, leading to product prices remaining high. There could be some global demand-side slowdown in FY24, led by the interest rate hikes and inflation control measures. However, Ind-Ra expects crack spreads to remain at healthy levels, helping refiners.
However, OMCs may face pressure on marketing EBITDA if international prices of key products - petrol and diesel - remain high as was observed in FY23 when OMCs did not hike retail selling prices to reflect high diesel and petrol FOB prices which had led to EBITDA losses during 3QFY22 – 2QFY23.
During 9MFY23, the total debt of Indian PSU OMCs increased 40% from their FY22 levels, mainly on account of an increase in the working capital debt to finance the losses incurred on the retail sale of petrol and diesel.
For FY24, while Ind-Ra does not expect loss funding to create borrowing pressure, refining companies are undertaking capacity expansions which could increase debt. Additionally, changes to crude oil procurements could impact working capital requirements in case credit periods are reduced. Lastly, higher-than-expected dividend outflows could increase leverage ratios.
The rating agency expects the CGD business to remain healthy in FY24, led by favourable regulatory policies, reduced, though healthy operating margins, negative working capital cycle and demand creation in new geographical areas.
“During 9MFY23, even after an increase in the gas prices (APM and RNLG), CGD gas demand have proved to be inelastic with average demand for YTM November 2022 at 33.4mmscmd. This was despite a lower-thanexpected consumption of gas by the industrial segment which is price sensitive. Regulatory policies including increasing the proportion of domestic natural gas supply to the CGD sector for CNG and D/PNG, first right to CGD companies on gas bids from deep water fields, extension of Minimum Work Programme targets have helped the sector," it said.
While the domestic natural gas prices have provisionally been kept at USD8.57/bbl for 1HFY24, Ind-Ra expects the CGD sector to benefit materially from the cabinet approval of Kirit Parekh Committee recommendations. However, if high prices continue, incremental demand could moderate. Furthermore, given the APM gas production decline, increasing demand from CNG and D/PNG will need to be met from other sources including RLNG/spot contracts.
The high gas price rally over YTDFY23 exerted pressure on the overall margins of the CGD sector; although companies could pass on cost increases historically, especially in CNG and D-PNG segments leading to healthy EBITDA margins. However, any change in the domestic gas pricing or priority allocation of domestic gas to the CGD sector could affect the margin profile.
Ind-Ra has also maintained a Stable rating Outlook for upstream oil companies and OMCs for FY24, driven by their strategic importance to the government of India, and for CGD entities due to their growth prospects.