An edited version of this story first appeared in DNA Money edition on Wednesday, April 11, 2012.
The decision by Petroleum and Natural Gas Regulatory Board (PNGRB) to cut gas tariffs in New Delhi has created a major furore in the market.
Going against the order, monopoly gas supplier in the country’s capital Indraprastha Gas Ltd (IGL) has approached the Delhi High Court to contest the PNGRB directive. “We are not clear how they (PNGRB) have calculated this tariff. We do not know the assumptions they have made. IGL has approached Delhi high court, where we have challenged the constitutionality and legality of the powers of the regulator to fix the tariff,” said M Ravindran, managing director, IGL at a media conference in New Delhi.
A joint venture of GAIL (India) Ltd, Bharat Petroleum Corp and the state government of New Delhi, IGL sells auto and cooking gas in New Delhi and adjacent areas.
While IGL is the first to be impacted by this order, industry experts said, other (listed and private) players like Gujarat Gas, Mahanagar Gas, Petronet LNG, Adani Gas etc. are likely to feel the heat next.
Rohit Nagraj, senior research analyst - institutional equity research, Centrum Broking, said the network tariff and compression charges submitted by IGL to the PNGRB have been slashed by almost 60%. “This decision by the regulator will certainly put pressure on peers as their tariffs will also be reviewed and revised based on the parameters used for ordering the price cut for IGL,” he said.
Echoing the sentiments, Dhaval Joshi and Jagdish Meghnani, analysts with Emkay Global Financial Services Ltd, added that post PNGRB’s announcement (and if Implemented) would result in private players staying away from the city gas distribution (CGD) space as lucrative margins would significantly curb down. “In the current scenario only public sector units (PSU) will be the key players in the segment which would run the business with the regulated margins,” the analysts said in their report.
PNGRB, the Indian downstream regulator with a mandate to set tariffs, in its recent order on Monday asked IGL to lower certain tariffs and prices of the natural gas it sells in the capital city. This move, analysts tracking the sector feel, will significantly impact IGL’s operating margins.
As per the new order, IGL will have to lower its network tariff for compressed natural gas (CNG) and liquefied petroleum gas (LPG) by around 60% in New Delhi as well as NCR. This in effect is expected to bring down the price of compressed natural gas in the capital could come down by 20% and of piped natural gas (PNG) by 10%. The new tariffs are applicable for a period of five years, post which assumptions regarding capex and operating costs will be reviewed and new tariffs will be effective prospectively.
The tariffs have been fixed retroactively from April 2008 (at levels lower than what IGL had been charging) and the PNGRB has also ordered the company to refund the difference to its customers, which as per rough estimates, could be as high as Rs 1,600 crore.
According to Dikshit Mittal, analyst - institutional research, Sbicap Securities Ltd, said the regulator’s decision to cut tariffs was largely based on IGL’s capex plans which the company management wasn’t able to justify. “This is a major negative for the stock and operating profits of the company are expected to decline by more than 50% as compared to our earlier estimates. At the net profit level, fall is expected to be much sharper with expected 80% downgrade in F13 PAT estimates,” he said.
Lower net block, lower future capex and higher volumes assumptions by the regulator have certainly led to lower approved tariffs feel Gagan Dixit and Sapan Shah, analysts with quant Global research. “Regulator assumed FY09 as first year of operations vs. IGL’s FY10, subsequently lower future profile of net block was assumed for tariffs calculations. Regulator conservatively assumed just 47% of future capex provided by IGL on steel pipeline network augmentation based on actual capex done vs. initially submitted in technical report by IGL. Additionally, PNGRB does not allow offsetting of 1-2% gas loss during operations via higher tariffs,” said the analysts in their report.
Since, marketing margins were agreed up on between the buyers and the sellers, it was said that IGL could charge higher marketing margins in an attempt to offset the lower tariff. However, it is now understood that the regulator has initiated the process to ultimately regulate marketing margin that can be charged by any gas marketing entity thereby negating any such possibility.
“While network and compression tariffs are calculated based on 14% post tax IRR, marketing margins are currently de-regulated. Currently, issue of regulating marketing margins is also under the consideration of PNGRB, which may limit flexibility in maintaining the margins,” Mittal said.
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