The domestic gas demand is expected to grow by 7% in FY2022, compared to FY2021 and a further 16% Y-o-Y in FY2023, following moderation in demand in FY2021 due to Covid-19. The growth is being driven by the commissioning of new fertiliser plants and increasing offtake by new GAs under City Gas Distribution (CGD) entities. However, any further waves of pandemic and lockdown measures remain a risk.

The domestic gas production is expected to increase from 79 mmscmd in FY2021 to 93 mmscmd in FY2022 and 106 mmscmd by FY2023 driven primarily by ramping up from RIL-BP’s KG-D6 and ONGC’s KG-98/2 fields. As domestic demand outstrips domestic supply, the proportion of RLNG in the domestic gas consumption remains high. The Asian spot LNG prices have been elevated due to supply-side disruptions, weak renewable power generation, odd weather patterns, low inventory levels, growing demand and increase in crude oil prices. There could also be a structural shortage of LNG capacity in the medium term, given the net zero commitments that different governments are making and under investments by global upstream companies due to ESG goals.

Further, the domestic gas price has also witnessed an upward revision from $1.79/mmbtu to $2.9/mmbtu for H2 FY2022, with further rise expected in next revision owing to increase in prices at various international hubs. Notwithstanding the increase in domestic prices, the cost competitiveness of CNG and PNG(d) remains favourable for City Gas Distribution entities compared to alternate liquid fuels and domestic LPG. However, relatively higher spot LNG & term LNG prices will have a negative impact on City Gas Distribution companies as margins on PNG (I) & PNG (C) could be impacted.

The increased demand and higher prices will drive healthy revenue growth of ~30% in current fiscal for ICRA rated domestic gas sector entities, however profit margin may witness some moderation due to increase in gas prices.  The credit profile is expected to remain stable, despite large debt funded capex expected over next few years, with TD/OPBIDTA at ~0.7x over next three years, while interest coverage is expected to improve from ~19.7x in FY2022 to ~23.0x in FY2024, supported by regulatory protection or dominant competitive position of most of the entities in this sector besides healthy margins and liquidity; and strong financial flexibility.

The petrochemical sector exhibited strong demand growth for several products led by e-commerce, packaging, health and hygiene and FMCG. This despite concerns like container shortage, port congestion and higher freight rates which led to lower imports and higher realisations for domestic manufacturers. The margins for most products remained healthy owing to the strong demand and logistical constraints. Going forward, the demand is expected to remain robust going driven by improving economic outlook and higher vaccination rates. The sector is expected to report healthy growth in revenues even as margins are expected to moderate. The capitalisation and coverage indicators for the industry remain healthy over FY2022 to FY2024. The interest cover remains more than 10 times and total debt/OPBDITA below 1.5x over FY2022 to FY2024 for the ICRA sample set of Petrochemical sector.