Ruchi Agrawal Moneycontrol Research
The results for the eighth round of city gas distribution bidding for Karnal, Kurukshetra, Ambala and South Goa were disclosed during the week. Organized development of network through bids and government’s initiatives to promote cleaner fuels has facilitated rapid expansion of city gas distribution in Indian cities in the last decade. Despite the heady growth, we still see significant opportunities for demand growth which puts the gas distribution & marketing companies in a sweet spot.
The bidding
As per historic norms, this bidding round also saw companies submitting bids for one paisa as network tariff. The winners have been decided on the basis of the performance guarantees submitted by them. Based on value of performance bonds IGL (Indraprastha Gas) has won the bid for Karnal (at Rs 306 crore), Indian Oil-Adani Gas bagged the deal for South Goa (at Rs 403 crore), and Ambala-Kurukshetra licence would be awarded to HPCL-Oil India (at Rs 303 crore). By next month, the licences are expected to be formally awarded to the respective companies by Petroleum & Natural Gas Regulatory Board (PNGRB). The bids for three more cities Yanam, Bulandshahar and Baghpat are still pending and are expected to be disclosed soon.
The background
City gas distribution network is the downstream gas retail network in India which broadly consists of CNG stations, cooking gas pipelines and retail market for industrial demand. The sector is highly regulated and the rights for developing the network are awarded based on geographical areas via a bidding process by PNGRB. Seven rounds of bidding have been conducted over the past 8 years under PNGRB and CGD network is active or developing in 74 cities currently (few cities had CGD networks prior to the formation of PNGRB).
CGD network – ambitious targets
Owing to the need to switch to cleaner fuels and gas being cheaper alternative to oil fuels, the government has been promoting the development of CGD network and various policy changes have been introduced from time to time to facilitate the same. NITI Aayog has recently recommended expanding the CGD network to 326 cities by 2022.
Demand Supply
Natural gas consumption had been showing a positive uptrend in recent years and grew at 7 percent in 2016-17. Given the policy changes and favorable trends in demand for complimentary services, we expect gas demand to grow at an even higher pace in the future.
However, the sector witnesses supply-side constraints. Domestic gas production feeds nearly half of total gas consumption in India currently, rest being imported. The production has been depleting in recent years. In order to keep pace with increasing demand, additional efforts will have to be made to exploit gas reserves and production.
The demand drivers Vehicle sales: With the expansion of CNG pumps across cities there has been a significant increase in CNG car sales. There are around 1,233 CNG stations across the country and 30,42,268 CNG vehicles which is minuscule.
Most automobile companies have launched CNG fitted variants for their car models, which should boost volumes. Moreover, the ban on externally fitted CNG kits was lifted in July-17. Owing to this the number of private and commercial vehicles converting to CNG would surge in the near term.
Mandatory piped gas in building structures: The government has accorded ‘public utility’ status to piped cooking gas and has made it mandatory for new building plans to incorporate pipeline infrastructure. This will boost the number of piped gas connections rapidly.
CNG bus/ auto rickshaw additions: The Delhi government has announced plans for an addition of 2000 buses in the current fleet along with issuing additional 10,000 auto rickshaw licences in the coming months. This will boost demand in Delhi thereby benefitting IGL. With growing popularity, other states are expected to follow suit.
CNG two-wheelers: Both IGL and MGL are piloting projects for the launch of CNG run two-wheelers. This could boost demand as well.
Industrial consumption: In order to replicate the benefits which CNG has given to the transport segment, cleaner gas fuels are now being promoted for industrial use. This switch would boost the demand from the industrial segment. Delhi has already announced the ban on industrial use of high sulphur fuels in the city and is promoting a switch to cleaner fuels like LNG.
Green corridors: The government has announced plans to build green corridors and ensure CNG stations on highways along Delhi and Mumbai. This could boost demand for gas marketing companies.
Overall, government’s policy initiative to switch to cleaner fuels has made the sector grow exponentially in the last decade, and the demand-side boost provides significant tailwinds for gas retail companies. Apart from a few supply-side deficiencies, which we believe can be addressed, the sector has immense potential for growth.
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