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City gas distribution (CGD) companies remain in focus owing to rising gas prices. Some of these companies, such as Gujarat Gas Ltd and Indraprastha Gas Ltd, have already taken certain price hikes. The same is in line to pass the higher gas costs to customers. With a rise in international gas prices, prices for domestically produced gas are also likely to see some hikes from 1 October.

However, despite price hikes the companies are expected to see good sales growth. Gas remains a cheaper and cleaner alternative to other fuels. The rise in crude oil prices has made petrol and diesel much dearer options for automobile fuel.

“Sales volume of city gas—comprising compressed natural gas, or CNG used by vehicles, and piped natural gas, or PNG used by homes and industries—is set to soar 25-27% this fiscal," rating agency Crisil said. The same is said to be driven by rebounding vehicular mobility. Industrial activity is also on the rise. What’s more, the sector has a record price advantage over competing fuels such as petrol, diesel and furnace oil.

The growth in demand is also to be helped by a lower base of last year. The first quarter of FY21 had seen a severe impact on mobility and industrial activities due to complete nationwide lockdowns. Comparatively, the current year saw a less severe impact as lockdowns were state-wide and the impact was also less.

As the benefit of a low base may help, the companies are expected to benefit from expansions too. A broadening CNG network and new geographical areas are expected to keep growth firm.

As growth remains strong, earnings are also to be propelled by the good operating margins of CGD companies. Domestic gas prices have remained at record lows during the first half of FY22 and will only see being hiked from 1 October. Only imported liquefied natural gas( LNG) were higher in the first half and in that too, LNG operators will absorb some of the higher costs

Apart from steady margins, robust balance sheets (with debt/Ebitda of 0.3x and cash of 4,600 crore as of 31 March 2021) would continue to support the credit profiles of city gas operators, shows a Crisil Rating study of five city gas distributors. These account for almost three-fourths of industry volume.

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