Open access norms: Regulator gives short-term respite to CGD players

Even as the Petroleum and Natural Gas Regulatory Board’s (PNGRB) latest notification on open access has provided a short-term respite to city gas distribution (CGD) players, the sector experts feel that competition from other players will ultimately weigh down on their profitability in the future.

In the notification, PNGRB has not allowed existing compressed natural gas (CNG) outlets of state-run oil marketing companies (OMCs) in CGD areas to sell the fuel through the open access route, implying that CNG sales volume of existing CGD players like Indraprastha Gas IGL and Mahanagar Gas (MGL) will not decrease immediately. However, a section of the industry noted that competition is imminent and profitability would be challenged eventually.

Analysts at Jefferies had noted that restricting OMCs from selling CNG under open access route will mitigate any negative impact on existing earnings of CGD companies like IGL and MGL in the CNG segment. After the release of the notification on Friday, share prices of IGL increased 10.9% from a day-ago to Rs 496.3, while MGL shares increased 14.4% to Rs 1,063.2 in the same period. As much as 60% of IGL’s volumes and around 65% of MGL’s volumes are from CNG stations, which are on OMC sites. OMCs receive a commission of Rs 3.7-4/kg and have already demanded a 90-100% rise in their commission retrospectively from the beginning of FY19.

“CGD players boosting Ebitda margin by not passing on the full benefit of fall in domestic gas price and PNGRB not allowing OMCs to take over incumbent’s existing CNG stations on their site would hurt their case in Court,” analysts at ICICI Securities pointed, adding that “CGD players’ EBITDA margin, which has seen secular rise in last few years, is likely to come under pressure with the advent of competition,”

The development comes at a time when marketing exclusivity has already expired in Delhi-Noida-Ghaziabad for IGL, Mumbai-Thane urban-Raigad for MGL. In its open access regulation, PNGRB has remarked that at least 20% of the CGD network and compression capacity would have to be made available for open access to new entrants as per the regulations. Analysts noted that in areas where marketing exclusivity is over for incumbent CGD players, decks have been cleared for competition as PNGRB is now likely to allow competition in these CGD areas one by one.

A report by Motilal Oswal pointed marketing exclusivity has ended in around 40-45 geographical areas (GAs), and the proposed open access will be implemented in a phased manner, with the first batch targeting only 6-8 GAs for pilot implementation. At present, the CGD network covers 232 GAs spread over 407 districts in 27 states. OMCs have authorisation for 77 GAs and have indicated multiple times that they are keen to foray into large-volume CGD areas like Delhi, Mumbai and Pune when the competition is allowed.