Gas Utilities
Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA Limited

After witnessing some moderation in FY2021 due to the Covid-19 pandemic, the domestic gas consumption is expected to grow by 9-11% in the current fiscal, driven by demand revival, post easing of lockdown measures, increasing offtake by City Gas Distribution (CGD) entities, expansion in pipeline network, new LNG terminals and commissioning of new fertiliser plants. Further, despite the increase in gas prices, the cost economics remain favourable for CNG and PNG (domestic) compared to alternate fuels, although the competitive intensity is higher in case of industrial fuels. Despite large debt-funded capex expected over the next few years, the credit profile of the incumbents in the sector is expected to remain healthy with average interest coverage expected at 23.0x for FY2023 from 22.4x for FY2021 and Total debt/OPBDITA expected at 0.62x from 0.72x for the sector, supported by regulatory protection or dominant competitive position of most of the entities in this sector, besides healthy margins, liquidity and strong financial flexibility.

Upstream Sector
Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA Limited

The upstream oil and gas industry benefitted from increasing demand and crude oil prices touching multi-year highs in the current fiscal which translated into healthy profitability and cash flow generation. ICRA expects oil prices to remain elevated in the medium term owing to increasing demand and graded increments in the production and supply by OPEC+ which will continue to support the revenues and profitability of the upstream oil and gas companies. However, any further waves of the pandemic or lockdowns remain a key risk to the demand and prices of crude oil. Moreover, the domestic gas prices have also witnessed an increase and it is expected that the domestic gas prices will go up further in the next round of revision, which would also support the profitability of the oil and gas companies. For the ICRA set of upstream companies, while revenues are expected to increase by more than 30% in FY2022 over the low base of FY2021, the growth is expected to taper to mid-single digits in FY2023 and FY2024 and operating margins remain healthy. The credit profile of the industry is likely to remain healthy with total debt/OPBDITA at around 1.6-1.7x in FY2023 and FY2024.

Refining & Marketing
Sabyasachi Majumdar, Senior Vice President & Group Head, ICRA Limited

The demand for petroleum products is witnessing an increasing trend after subsiding during the March-April 2021 period due to the second wave of the Covid-19 pandemic and is expected to grow by 8-10% YoY in FY2022. The core gross refinery margins (GRMs) of refiners were weak in the initial few months of FY2022 but have improved sharply with increasing demand amid limited supplies and permanent closure of refining capacities in high-cost locations. However, any further waves of Covid-19 pandemic and lockdown measures remain a key concern. The under-recoveries are expected to be minimal in FY2022 owing to the increase in domestic LPG prices. Owing to the deleveraging by RIL, the industry debt levels have declined from Rs. 5.8 lakh crore in March 2020 to Rs. 4.5 lakh crore by March 2021 and are expected to further moderate to Rs 4.1 lakh crore by March 2024. The debt coverage indicators of the industry are expected to improve – with interest coverage expected to improve to 8.0x for FY2023 and 8.5x by FY2024 from 5.8x for FY2021 and Total debt/OPBDITA expected to decline to 2.3x and 2.2x from 2.7x over the same period.