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Though gas price has been raised, concerns for plants and fertiliser makers are not over. Experts say gas availability could take two-three years to improve. And, because of the rise from $4.2 to $8.4 a mmbtu, it will hurt power producers and fertiliser makers.
Fertiliser
Fertiliser being politically sensitive, pass-on of the price would mean extra burden on farmers or the government will have to bear additional (subsidy) burden, as high as Rs 8,300 crore.
Even if it bears the subsidy, companies will see a rise in working capital requirement leading to higher interest costs. CRISIL Research sees 30-40 basis points dip in net profit margin for urea makers. In terms of operating profit, there seems no impact up to the cut-off levels as the fuel costs are a pass-through (cut-off levels at 110 per cent of capacity). Beyond the cut-off, manufacturers make more profits as the subsidy gets linked to import parity price (IPP) and the gas costs are not pass-through. Thus, for output above cut-off, India ratings sees a dip in operating profit margins from 46 to 12 per cent. (Click for charts)
For Tata Chemicals, they say profitability above cut-off can see Ebitda margins dip to 22 per cent from 54 per cent (considering IPP at $335 a mt and rupee-dollar rate at 60). However S P Tulsian says gas availability will get a boost. Even capacity utilisations will increase and many naphtha-based capacities will shift to more profitable gas-based output. Also, since the government is looking at cutting the subsidy on urea, it may increase urea prices after elections. This has raised optimism and that government has not fixed the input gas prices, raising the expectation it may accede to the fertiliser sector's request of fixing input prices at $6.7.
Stocks of urea players National Fertilisers, RCF, Chambal Fertilisers and Tata Chemicals have reacted positively. Kalpesh Thanki, analyst, Sharekhan, says stocks had corrected 50-60 per cent and valuations have become attractive.
Power
In May 2013, gas-based power plants saw their PLF (plant load factor) fall to 29 per cent against 50.3 per cent a year ago. The largest company, NTPC, with 3,955 Mw of gas-based capacity, saw its PLF for plants drop to 44.2 per cent in May 2013 from 70 per cent last year. Industry estimates suggests of 18,800 Mw capacity, 15,000 Mw is sitting idle and 3,000 Mw running risk of defaults. Lanco Infratech, GMR and GVK are facing difficulties due to lack of gas availability.
Even at current utilisation of about 29 per cent, the cost of power through gas is as high as Rs 6 a unit (landed costs plus fixed charges). The new gas price at $8.4 would mean significant increase in cost of power. "Overall, cost of gas-based power generation (at delivered cost of $9.5 per mmbtu) is estimated at Rs 5.5 a unit that reflects a sharp rise of 47 per cent over the power generated with gas at currently prevailing delivered cost of $5.5 a mmbtu," said K Ravichandran of ICRA.
Analysts say the new price a unit for gas-based power plants will work out to be 85 per cent higher compared to domestic coal-based power. However, the impact of this on the profitability of companies will be limited as they have cost-plus-return purchase power agreements (PPAs) with distribution companies (discoms). But, if discoms become reluctant to offtake costlier power, it would expose companies to the risk of underrecoveries of the fixed charges. "The operations for certain companies, who operate in either merchant mode or on fixed-tariff under short-term PPAs, will be affected. More, such plants would also be exposed to the lowest priority in domestic gas availability," said an analyst with ICRA.
Though higher gas prices may lead to better availability in the long run, there are apprehensions about viability. "Even if the gas availability increases, at the current price, the gas-based plants do not have competitive price advantages, which means the risk of offtake continues to remain and has increased. Discoms buy power based on merit order dispatch, thus they will buy high-cost gas-based power only if demand for coal-based capacity is already met or if there is demand from industrial consumers willing to pay higher rate," said Salil Garg, director - corporates, India Ratings.
