Natural monopolies hold the key

IN FOCUS/ GAS RETAILING

Safety in the gas retailing business in the country today continues to mean a quasi-monopoly position in the market. As long as such monopolies are in place in an energy-deficient market like India, the prospects of companies in the business would be comfortable, according to energy sector analysts.

This was because the industry was capital intensive, requiring large investments in fuel import and handling facilities besides sensitive investments like laying of pipelines in densely populated cities and similar areas, they pointed out.

Only ventures with deep pockets could hope to be serious players but here too, natural monopolies would play a big role in securing investments.

"The business is too complex for the sustained viability and growth of multiple players in the segment", said analysts.

Take the case Mahanagar Gas Limited (MGL). The company has a monopoly of the Greater Mumbai gas distribution licence area and has a diversified business portfolio. In addition, it had preferential access to gas supplies from GAIL, both for existing operations and also for the expansion projects currently on its hands.

Credit rating agency ICRA Ltd recently assigned the status of 'high safety' to MGL's non-convertible debenture programme, basing it on factors like its parentage and the strong financial position characterised by strong profitability, moderate gearing levels and availability of sizeable liquid surpluses.

ICRA however has warned that going forward, MGL's future profitability could get impacted by the possible increase in gas prices.

However, the range between MGL's prices for different consuming segments and the prevailing prices of alternate hydrocarbon fuels provided MGL with some flexibility to pass on some part of higher gas prices to its consumers, ICRA added.

MGL was currently involved in implementation of a gas distribution project in the Thane and the Navi Mumbai licence area.

This would necessitate MGL to take on some amount of project risks, but the risk associated with the expansion projects were partially mitigated by MGL's existing strong financial position, its prior experience in implementation and management of such projects, and access to active technical support from its promoters.

MGL was set up as a joint venture between GAIL Limited and BG Plc.. It was the sole distributor of natural gas in the Greater Mumbai region.

The company was in the process of setting up a similar distribution network in the additional areas already mentioned.

MGL at present supplied gas to the industrial, residential, commercial and the compressed natural gas (CNG) segments.

MGL currently enjoyed an allocation of 2 mcmd of gas, all of it sourced from GAIL. For the year 2003-04, the company registered net sales of Rs 286 crore on which it earned a PAT of Rs 82 crore.