Increased PNG consumption likely to push operating profit margins in next fiscal

With the 22-25 per cent decline in the prices of LNG since January this year, and an expected 5-7 per cent increase in consumption of piped natural gas (PNG) and CNG should drive up the operating profit margins of city gas distribution companies in FY20, says a report. The spot LNG prices are likely to be in the range of USD 6.5-7 per mmBtu in the first half of fiscal 2020, rating agency Crisil Research said.

The operating profit margins of city gas distribution companies likely to go up by 2.50-3 percent in the first half of fiscal 2020, Crisil said. "If the LNG price holds at USD 7 per mmBtu, it would mean a positive impact on LNG demand, especially from price- sensitive sectors. Also, the National Green Tribunal's recent decision to shut down coal gassifiers in Morbi and Wankaner ceramic clusters in Gujarat would drive LNG demand in the region," it said.

Also, the ban on polluting fuels in northern states, too, would whet appetite for LNG, it said. "We expect spot LNG prices to remain low going forward given a slow improvement in demand from China and an increase in supply of LNG with expected new liquefaction terminals," Crisil Research Director Rahul Prithiani said.

The agency further noted that the improvement in margins for city gas distribution entities would be more pronounced with higher share of industrial consumers of PNG. "In the last 3-4 months, these entities were forced to slash industrial PNG prices to match alternate fuel prices, which have headed south following a sharp fall in crude oil prices since November last year. However, with the decline in LNG prices, industrial PNG has become cost-competitive with fuel oil," its Senior Director Prasad Koparkar said.

According to the agency, gas volumes would be supported by development of gas infrastructure in untapped areas, given the upcoming LNG terminals at Ennore and Mundra, pipeline connectivity from Jagdishpur to states such as Bihar, Jharkhand, West Bengal and Odisha. Further, increasing penetration of the infrastructure in existing areas, regulatory push to build extensive gas network in various parts of the country, and restriction on burning dirty fuel would give a push to increased volumes.

(With inputs from agencies.)