The gas price increase will hit fertilizer sector's profitability by increasing working-capital requirements
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The 62% increase in natural gas prices by the government will boost profitability of Indian upstream companies and support their investment spending, says Fitch Ratings.
The price for gas from fields that were assigned by the state to oil companies, mainly state-owned Oil and Natural Gas Corporation Limited (ONGC) and Oil India Limited’s (OIL), increased to $2.90 per million British thermal units (mmBtu) for October 2021-March 2022 from $1.79 per mmBtu in April 2021-September 2021.
The government also increased the price ceiling for gas produced from deepwater and other difficult fields to $6.13 per mmBtu from $3.62 per mmBtu. Reliance Industries Ltd's gas production from KG basin will benefit from the higher price ceiling, but the impact on RIL’s financial profile is minimal as gas makes a limited contribution to its revenue.
Higher gas prices will increase the input cost for key end-consumer sectors, to the extent the price hike is passed on. Domestically produced gas is supplied on a priority basis to certain sectors, with 30% of it consumed by power producers, around 27% by the fertilizer sector and 19% by city gas distributors in FY21.
The gas price increase will hit fertilizer sector's profitability by increasing working-capital requirements. Auto gas fuel’s price will remain competitive against liquid fuels, albeit with a reduced differential, notwithstanding the gas price increase. This is because liquid auto fuel prices have also been climbing in recent months, given the rise in crude oil prices. The cost of power generated by gas-based power plants will increase, which will further decrease their utilization.
"We expect OIL’s FY22 leverage to be 1.9x, comfortably within our negative rating threshold, but leverage could come close to our negative sensitivity of 3.0x in FY23, as its capex intensity increases. Natural gas accounted for about 13% of OIL’s upstream revenue in FY21," said Fitch Ratings.
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