City gas operators are expected to post an operating profit of Rs 7.2–7.5 per standard cubic metre (scm) in the current fiscal, marking an 8–12% recovery from the sharp margin erosion seen in 2HFY25, as per a report by Crisil Ratings. The report noted key factors contributed to the growth and key risks to watch out for-
Shift to contracted supplies boosts profitability
The report said City Gas Distribution (CGD) companies have secured more long-term and medium-term gas contracts, reducing their reliance on spot markets where prices remain significantly higher. These new contracts include domestic new well gas, HPHT gas and imported R-LNG.
Ankit Hakhu, Director at Crisil Ratings, said companies are now better placed to manage their fuel basket. “Against the 30% reduction in APM allocation for the CNG segment, CGD companies got 15–20% long-term allocations from domestic new well gas, mainly towards the end of last fiscal or early this fiscal. For the balance, they have signed additional medium- and long-term contracts. This will not only improve gas security but also reduce exposure to the spot market, where prices are 25–30% higher on average.”
CRISIL expects overall procurement costs to be around 5% lower this fiscal compared to the second half of last year.
Stable realisations, rising costs
City gas companies had raised prices in the latter half of last fiscal to partially pass on higher costs. With realisations now steady and procurement costs easing, margins are returning to pre-cut levels. However, the report pointed out that some of the gains will be offset by an increase in operating expenses as companies continue to invest in expanding gas infrastructure across existing and new geographical areas.
Ankush Tyagi, Associate Director at Crisil Ratings, said the recovery is broad-based. “The reduced procurement cost and steady realisation should take operating profit back to Rs 7.2–7.5/scm this fiscal—levels seen prior to the APM cut—from ~Rs 6.7/scm in the second half of last fiscal,” he said.
Volume growth to stay healthy
The CGD sector is expected to see 8–10% volume growth this fiscal after posting nearly 15% growth last year. Increasing network expansion, strong cost competitiveness—CNG remains 20–40% cheaper than petrol and diesel—and a potential demand push from the GST reduction on automobiles are likely to support consumption.
The combination of recouped margins and higher volumes is expected to lift cash accruals by about 10%, helping companies fund their capital expenditure while keeping leverage at about 1.0x debt-to-Ebitda. Most CGD operators currently carry minimal or no external debt.
Risks ahead
Crisil said a meaningful margin expansion next fiscal looks unlikely as crude prices remain benign and operating costs continue to rise. It added that further APM allocation cuts, policy changes, and geopolitical events affecting global energy prices remain key risks to monitor.
