Return profiles of CGDs to remain strong: Ind-Ra

As the government is unlikely to implement major policy-level interventions in the CGD entities either through a change in the gas allocation policy or capping the returns earned by them, their return profiles are likely to remain structurally strong, says India Ratings.
"City gas distribution (CGD) entities will continue to benefit from a favourable industry structure, which has resulted in a strong business and financial profile," it said in a report.
The business profile is strengthened by the players' sole supplier status in their respective geographical areas, supply-side advantages in the form of access to crucial inputs such as gas supply and availability of land for setting up a marketing infrastructure for both compressed natural gas (CNG) and piped natural gas (PNG).

Also, regulatory support in the form of the gas allocation policy, ban on the use of petrol and diesel for public transport in some cities and ban on the use of FO/LSHS/pet coke in favour of PNG and the habit forming nature and ease of use of PNG, strengthens their profile.
Ind-Ra said CGD as a space complements the government's move towards cleaner fuels and any policy directed towards lowering the importance of CGD could derail the objective.
Also, the CGD space has been an un-regulated sector from the marketing perspective, a move back to make the sector regulated could be retrogressive.

"The government's intention has been to bring in competition rather than regulate the sector. Lastly, the capping of returns has generally been provided to ensure investments in capex-heavy sectors. CGD has lesser capex requirements than other regulated sectors," it said.

Ind-Ra opines the business and financial risk profile of CGD entities even in new cities is likely to remain strong, despite increasing competition the sector with bidders quoting low tariffs for both network tariff and compression charges and high guarantees.
"Other factor for the healthy profitability of CGD entities is the high incidence of tax on the competing fuels namely petrol and diesel. This results in CNG price being quite competitive compared to other alternative fuels' on price per calorie basis," it said.

Ind-Ra does not envisage this tax arbitrage narrowing, as the government derives a significant portion of the gross tax collections from petrol and diesel.
The agency expects the crude prices to remain range-bound between USD 50-60 per barrel and it is unlikely that the taxes on the fuels will see a significant reduction.
The equation could, however, change if crude prices rise significantly and the government to keep the retail prices in check, lowers the tax incidence and at the same time the price of domestic gas rises, it said.
Ind-Ra further said oil marketing companies (OMCs) do not pose a threat to the business models of CGD players in terms of setting up their own city gas infrastructure post marketing exclusivity.