GAIL: No Relief in Sight

India’s biggest natural gas company- Gail has been hit over the past two years marked by an ad hoc subsidy burden and operational issues. Dwindling natural gas volumes are makings its operations less profitable even though it is continuing its expansion projects.
During the past two fiscal years, Gail expanded its natural gas transmission capacity nearly 25% to 214 MMSCMD by spending nearly 6,000 crore to a pipeline length of 10,700 km. Still the natural gas flowing through its network was 18% down in the June quarter to 99 MMSCMDfrom 120 MMSCMD in the quarter to March ’11. This has impacted the return Gail earns on its employed capital (RoCE) which has dropped steadily in the past two years. This has prompted Gail to scale down its capital expenditure plans. Two years ago, it had projected 9,622 crore of capital expenditure for FY14, which was cut to 5,398 crore recently. This strain is reflected in the 33% drop in the company’s value in the past two years. However, there does not appear to be any near-term prospect of improvement.

Rains Can’t Wash Away Fert Cos’ Woes

India may be gearing up for a record agricultural output this year, but domestic fertiliser makers are unhappy. That is reflected in the industry’s gross under-performance on the bourses over the past one year, with most companies having shed between 10% and 60% in value. There may be some improvement in sight, but hardly adequate to make any significant impact on the industry's fortunes.
Sales volumes of the fertiliser industry have been under pressure of late. Provisional data released by the fertiliser ministry shows that total fertiliser sales in the April–June 2013 quarter were down 10.2% compared to year ago. Volumes fell for de-controlled fertilisers, while urea volumes grew 6% to 5.9 million tonne.
“Failure of monsoon last year led to lower sales, which has led to carry forward of higher inventory of finished fertilisers in the current fiscal. This, in turn, would again impact production levels in the current year,” says G Chokkalingam, chief investment officer at Centrum Wealth Management.
Volumes are still down, but a better monsoon is helping companies liquidate their inventory, with urea sales jumping 27% y-o-y in the single month of June 2013. Even non-urea volumes showed a marked improvement in June on a sequential basis. A note from Edelweiss Securities says that non-urea production volumes grew 3.7% y-o-y in June 2013 after 15 straight months of decline, with the only exception of December 2012. 
A recent report from brokerage house Prabhudas Lilladhar also says that their channel checks revealed an improved traction for fertilisers in past one month. The area sown has increased to 518 lakh hectares as compared to 342 lakh hectares at this time last year, the report says. The industry is also battling worsening working capital cycle. “Over . 30,000 crore of subsidy for FY13 was not cleared to the fertiliser companies impacting their balance sheets,” says Centrum’s Chokkalingam. A fall in the rupee over the past two years will also bloat the working capital needs of the industry, according to him. In other words, although the uptick in volumes is a good indication, the sector won’t benefit in the near term.
“We believe short-term challenges persist for the industry due to excessive channel inventory,” says an Edelweiss report. It expects manufactured volumes to pick up, but traded volumes to take a hit. “The underperformance by the sector is likely to continue till the government comes up with strong measures towards mounting subsidy burden on the fertiliser companies,” says Ajit Mishra, assistant vice-president, equity retail research, Religare Securities. Centrum’s Chokkalingam advises investors to stay away from the sector at least in the near term. “Investors can actually wait for June 2013 quarter results, which are expected to turn out poor for many companies,” he says. 

HISTORIC HIGH: Other income rose 33% from a year ago to . 2,535 cr

Other income rose 33% from a year ago to . 2,535 cr 

Other Income Fuels RIL, Capex may Boost Stock 

    It has been close to two years since Reliance Industries, or RIL, reported extra gains from treasury operations to spring a surprise or two while unveiling its quarterly numbers. The company’s results for the quarter to June stood out for the fact that treasury gains were at an all time high, beating analysts forecasts.
RIL’s other income for the quarter soared 33% compared with the yearago period to . 2,535 crore, a historic high. The company said this was mainly on account of profit on sale of investments in fixed income instruments and higher average liquid investments.
Two factors have contributed to this. First, the company was generating more cash than it was investing, resulting in a bulging cash balance, which was . 93,066 crore at the end of June this year. Second, the company was using low-cost foreign currency debt — $12 billion, according to Barclays’ estimates — to fund its capital expenditure plans. This helps it to book interest income on idle funds as income every quarter, when interest expenditure — as well as foreign exchange losses — on borrowed funds get capitalised or added to the cost of assets being constructed.
Reliance, India’s second biggest by market capitalization, had outstanding debt of . 80,307 crore at the end of June this year, up from . 72,427 crore at the end of FY13.
For main business segments such as refining and petrochemicals, the numbers RIL posted for the June quarter were more or less in line with forecast. Gross refining margins, or GRM's, — a measure of the differential between the cost of raw material and revenues from selling finished products — rose to $8.4 per barrel from $7.6 a year ago. For the oil and gas segment, the output drop and its impact on profitability were also in line with analyst forecasts. However, investors need not feel disappointed. The company’s liquidity position will boost capacity expansion. RIL’s capital expenditure programme appears to be gaining pace. During April - June 2013 the company added . 10,523 crore to its fixed assets, which was more than half its net addition in entire FY13. This could gain pace as the stated capacities start getting commissioned, possibly from the second half of FY14. For those with a long-term perspective, these may be good news. 

RIL Profit may Grow 13-15% in Q1

Natural gas production at Reliance Industries’ KG basin field may be consistently declining, but the company is likely to emerge as one of the outperformers in the June quarter. While aggregate earnings of Sensex stocks are forecast to grow less than 5%, RIL is expected to record a net profit growth of 13-15% during the quarter.
RIL is expected to benefit from marginally higher gross-refining margins — or GRMs in petroleum parlance, representing the differential between the cost of raw material and revenues from selling finished products — compared with the yearago period. Similarly, a 3.2% YoY depreciation in the rupee will mean more rupee profits per dollar of GRM.
GRMs contracted substantially in April-May 2013. But they improved in June 2013, taking the average for the quarter above the year-ago period. The expected GRM at $8.5 per barrel will be higher by nearly 12% YoY,
    but down 16% from the preceding quarter.
Singapore complex margins, considered as a proxy in estimating RIL’s GRMs, declined 24% in April-June 2013 from the preceding January-March 2013 quarter. However, a fall in Brent-Dubai differential and lower LNG prices are likely to boost RIL’s premium over Singapore complex margins, according to a Nomura report.
The petrochemicals division is also expected to post robust numbers, thanks to higher global margins as well as an increase in customs duty on polymers. Oil and gas will be the only segment to prove a drag on the results as natural gas production has dipped to 15 mmscmd, 54% down from 32.5 mmscmd in the year-ago quarter.
RIL carries a chunk of foreign currency debt, but it is unlikely to book any mark-tomarket losses after the slide in the rupee. According to a Barclays report, RIL faces around . 6,000 crore in translation losses on its $12-billion forex debt, but the bulk of it will be capitalised.
Analysts will be looking out for some updates on new polyester capacity and other downstream expansion projects. They will also watch out for comments on how the proposed higher natural gas price would influence the company’s exploration programme, and on production improvement. 

Subsidy to Hit Oil PSUs, Weak Re may Aid Pvt Cos

Under-recoveries have fallen 43% in Q1, but payment delays to affect PSU profits

This earnings season is unlikely to provide any excitement for the domestic petroleum industry. For PSU firms, the numbers will depend on the level of subsidy, while private companies should do well, thanks to aweak rupee. 
The industry is estimated to have been hit by under-recoveries, or sales below cost, of close to . 27,000 crore for the April-June 2013 quarter — a drop of nearly 43% against . 47,811 crore in the April-June 2012 quarter. Still, the PSUs will face the brunt of it because of delay in payments by the government. According to reports, the petroleum ministry has sought . 11,451 crore from the government, while upstream companies such as ONGC, Oil India and Gail will contribute . 14,906 crore. Downstream oil marketing companies such as Indian Oil, BPCL and HPCL are also expected to take a hit because of a weak local currency and the rising cost of crude oil. These three firms should post net losses, but lower compared to the past year. Upstream oil and gas producers ONGC, Oil India and Cairn should benefit because of the weak rupee. But the subsidy burden will limit gains for ONGC and Oil India. For Cairn India, Q1 profits may come under pressure, thanks to lower crude oil realisations and higher government share in the Rajasthan output. However, the key figure to watch out for will be output numbers, which is expected to improve. RIL is likely post better numbers compared to a year ago, thanks to higher gross refining margins and rise in margins in its petrochem business. Essar Oil may need to provide mark-to-market losses on its foreign currency loans, which will pull down its numbers.
The natural gas industry’s show will remain weak with availability of gas locally declining consistently. Gail’s volumes are expected to dip further, although that may not directly impact its bottom line due to take-or-pay arrangements. Lower LNG prices are expected to improve Petronet LNG’s volumes and in turn earnings. From the perspective of retail investors, there is nothing exciting to look forward to in the June 2013 quarter’s results season. 

ADVANTA: FDI Nod to Boost Growth

India’s biggest seed company Advanta was trading over 30% below its peak valuation in early March 2013. Yet the stock has generated over 50% returns for its shareholders in the past one year. The company will certainly be a favourite as the industry’s prospects appear bright, especially with the government set to open up the sector to atttact foreign investment.
For the quarter to June ’13, Advnata reported a spurt of over 120% in net profit to 31.7 crore at the consolidated level. For the first half, profits were up 35% year-on-year. This strong performance comes on the back of a very good year in 2012, when it posted a near five-fold spurt in net profit.
India’s seed industry is expected to grow at a CAGR of 17% over the next four years. The government’s decision to allow FDI in the sector makes the industry more attractive even for private equity funds. “In the long run, the prospects of the (seed) sector would be good. In fact, this sector would be one of the best sectors to play in the entire value chain,” says Sandeep Raina, AVP, Retail Capital Markets, Edelweiss Financial Services. Advanta could well be a beneficiary then.

SINTEX INDUSTRIES: Leveraged, Co’s Growth Plan May Spook Investors

Plastic goods maker Sintex Industries managed to maintain its year-ago profit level in the April to June quarter. However, its operational performance was weaker than expected. In the current market conditions, the aggressive growth plans of Sintex may not appeal to investors, who are actively shunning leveraged companies. For the April to June quarter, Sintex posted a 4.4% year-on-year growth in consolidated revenues at . 1,128.1 crore, but operating profits fell over 19% to . 104.6 crore. Its interest burden, too, was 22.8% higher at . 43.4 crore. Only the sharp drop in forex losses and lower tax provisions helped the company post a slightly better net profit than a year ago. The company has been facing working capital issues in its monolithic business, which has forced it to go slow. Hence, the 13% fall in revenues for that segment, on the back of a 7.8% drop in FY13, was not unexpected. However, Sintex also took a hit on its domestic custom moulding business, whose revenues fell 16.4% year on year during the quarter; the business was one of the star performers in FY13, posting a strong 29% growth. “Domestic business witnessed strong pressure from the automotive segment, where the number of large automotive manufacturers has seen a decline with the sluggish economic environment,” said the company’s press release. Sintex’s business of pre-fabricated structures remains as the main growth driver, with revenues during the quarter growing 18.8%, after a 35% spurt in FY13. Its textile segment also did well. The company is planning . 1,700-crore capex to set up a value-added yarn plant in Gujarat. At a time when the performance of its existing businesses is under pressure and the balance sheet is leveraged — consolidated debt-equity of 1 as on March 31 — this may not go down well with its investors. On the other hand, a potential 37% equity dilution, assuming all convertibles and warrants are converted into equity shares, will almost neutralise the gains to retail shareholders. 

MANGALORE CHEMICALS: New Owner, Use of Natural Gas Can Improve Show

The stock of Mangalore Chemicals and Fertilisers, or MCFL, which has more than doubled in the past three months, was locked at at 10% upper circuit on Wednesday at . 61.7 after the Karnataka-based company emerged as a target for a takeover. The prospect of a bidding war for MCFL increased when Pune-based Deepak Fertilisers took a 24.5% stake last week in the company that produces urea and phosphatic fertilisers, after Zuari Global acquired a 10 % stake. MCFL has long been a comparatively inefficient player in the fertiliser industry with low operating margins, says Sunil Jain, head of equity research at Nirmal Bang Securities. According to him, it will be a little while before the company converts to natural gas. It is also weighed down by huge outstanding subsidy claims. At the end of FY13, the company had a debt of close to . 1,200 crore on its books, almost 85% of which was towards working capital to fund . 1,070 crore of delayed subsidy receipts. However, MCFL’s key location and the projected shift to natural gas appear to have piqued Deepak Fertilisers’ interest in the company. The decision could have been influenced by MCFL plant’s proximity to the New Mangalore port, from where all the important inputs can be imported, says Rajen Shah, Chief Investment Officer, Angel Broking MCFL is working on a feedstock conversion project that will enable it to use natural gas in place of the costly naphtha. The project is scheduled for completion by early 2014. The company plans to source regassified LNG from Petronet LNG’s Kochi terminal and has entered into supply and transportation agreements with Indian Oil and Gail India. This will lower costs considerably, thereby reducing its subsidy burden and financing costs. In FY12, the company had spent . 775 crore, or 21% of its revenues, on naphtha, while interest costs accounted for over one-third of its operating profit. Investors may benefit if they stay on as the prospects are likely to improve for the company if there is a new owner on board. 

OIL INDIA: Going up Steadily

Being a smaller peer to industry biggies such as ONGC, state-run Oil India is hardly spoken about when there is any discussion on India’s petroleum exploration and production sector. However, it is doing well in certain key areas, which can help the company emerge as a better value creator for investors. 
Oil India is using its capital more efficiently, argues Barclays in a recent report. According to the report, Oil India’s ‘finding and development (F&D) costs — costs incurred when acquiring, exploring and developing properties to establish hydrocarbon reserves — is just 55% of ONGC’s. This has helped Oil India maintain its return on capital employed, or RoCE, consistently higher than ONGC’s over the last decade.
When it comes to production growth, Oil India does a better job. Its output grew at a cumulative annualised growth rate, or CAGR, of 3% over the last decade, while ONGC’s annual growth dropped at an average of 0.4%.
Oil India’s out-performance will continue even in future, according to Barclays, as it spends $2.4 billion to achieve 4.2% annualised growth in production over the next four years. ONGC is expected to spend $24.2 billion to achieve a 2% annualised growth in production in the next four years.

NATURAL GAS INDUSTRY: Growth Pains to Continue on Low Availability

Once a sunrise industry, it is a challenging phase for India’s natural gas industry. Over the past year alone, there has been a wealth erosion of close to 25% for companies in this sector. With flagging domestic availability of natural gas, the near-term outlook for the industry remains clouded. The failure of RIL’s KG field led to an annual average drop of 10.7% in India’s domestic natural gas production over the last three years, a trend which is likely to continue despite the announcement of an increase in prices. “We do not see domestic natural gas production to scale up till March 2015. In fact, domestic natural gas production is expected to fall till then,” says Niraj Mansingka, associate director, Edelweiss Financial Services. According to him, gas production is expected to scale up beyond March 2015, and add 30-50 mmscmd till March 2018 depending on approvals. The other factor which will weigh on the performance of the industry is the regulatory overhang from the Petroleum and Natural Gas Regulatory Board (PNGRB), which has imposed several sharp tariff cuts for various pipelines in the past. The major overhang of PNGRB is mostly over, other than in the case of IGL where the hearing is still pending in the Supreme Court, and pending tariff for GAIL’s Gujarat pipeline network, says Nitin Tiwari, oil & gas sector research analyst, Religare Institutional Research. These imply that companies are going to earn much less for every rupee invested as compared to past. Return on capital employed (RoCE) and capacity utilisation of the industry would continue to be negatively impacted due to low domestic natural gas production, says Edelweiss’ Mansingka. Imports by way of LNG made up for a part of the shortfall, but a further growth from here appears difficult with Petronet LNG’s Dahej terminal reporting full utilisation. In fact, the delayed commissioning and expected low utilisation levels at its Kochi terminal is expected to bring down profitability. The weak outlook for Kochi, which now makes up 61% of capital employed and has driven a 6-9% cut in FY14-15 consensus EPS in 2013 so far, may continue to be a headwind despite the shares’ 39% underper- formance since end-2011, says a recent report from Barclays. The industry’s under-performance of late has taken valuations to historical lows as well as below global peers. However, the near-term pain is likely to continue. Investors should consider buying into some of these stocks only if they have a three- to five-year horizon. 

‘Energy Poverty’s Best Prevented by Income Transfers, Not Subsidies’

The annual edition of BP’s Statistical Review of World Energy is eagerly awaited by the industry, academia and policymakers keen on long-term trends in energy markets. Christof Ruhl, chief economist of BP, the man in-charge of not only compiling the humungous data but also making the numbers tell the story, was in India to unveil the 2013 edition of BP’s Statistical Review of World Energy. He shared his views on the emerging trends in global energy markets with ET’sRamkrishna Kashelkar. Edited excerpts 

How do you see global oil prices panning out over the next few years? What will be the key drivers? 
As a matter of course, we don’t publish price forecasts. We do however, spend a lot of time researching and publishing data on the fundamentals driving oil prices, both in the annual BP Statistical Review of World Energy and in BP’s annual Energy Outlook. There are at least two clearly discernible trends — on the supply side, the surprising growth of tight oil and the relentless shift towards emerging market economies on the demand side. We do think that OECD demand is likely to have peaked in 2005 and is in structural decline since. This indicates a relatively strong supply growth outside OPEC and moderate demand growth for the rest of this decade. Consequently, we believe that global oil markets will come under pressure, with OPEC being forced to cut its own production to stabilise the system. 

How do you view the advent of shale oil and gas and growth therein? Which are the countries likely to lead the unconventional hydrocarbons revolution? The resource is widespread globally, but its production is still in its infancy outside North America. I think it is very important to understand why this ‘revolution’ took place in the US and Canada, and not elsewhere. The reasons are not merely the availability of resources below ground. The reasons have much to do with what our industry likes to call ‘above ground’ factors — free access, competition and stable and conducive investment rules. Who is next in bringing these resources to market will thus not be a function of resource availability alone but of political decisions, mostly in two spheres — allowing for free access and competition among private investors to attract the necessary capital and technology and the constraints a society puts in place to prevent damage to our natural environment. In our outlook, we have China in the matter of shale gas and Russia in the matter of tight oil as the two next big producers for the period to 2030. But there are many smaller places in between which have large potential to realise. 

What will be the impact of a boom in shale oil or gas on OPEC in the medium term? How do you think OPEC will react? The growth of unconventional liquids is already changing global oil balances. We estimate increments of unconventional non-OPEC supply will account for all of the net growth in global oil production over this decade, and of 70% of the growth from 2020-30. There are large uncertainties, but our estimates at the lower end of a wide range of such estimates. In a normal market, this will bring down prices. But in oil markets, the impact seamlessly translates into the question how OPEC will respond. We assume that OPEC members are willing and able to curtail crude oil production in response to the new supplies over the current decade to balance oil markets. Even under our conservative scenario, this will translate into OPEC spare capacity climbing to the highest levels since the late 1980s and OPEC’s market share falling for years. The ability of OPEC to enforce these cuts is one key uncertainty here. The other is the future production level of tight oil. 

How do you view the influence of speculators and investors on crude oil price movements? Will that continue to go up in future? From time to time, and mostly when prices rise — rarely when they fall — people speculate about speculators or financial investors. Usually, without even as much as a clear definition of what the term “speculator” is supposed to mean and despite the fact that the fundamental forces of demand and supply appear to explain price movements well. Many studies — from academia, think-tanks, the industry, financial sector regulators and government agencies alike — have investigated the evidence and tried to establish a causal relationship between financial investment and oil prices. To the best of my knowledge, none has found a smoking gun. 

How do you view India’s current status with regard to high import dependency? What specific measures should India should adopt to ensure long-term energy security? Generally speaking, the key for energy security lies in liberalisation and global integration. A fast-growing emerging market economy such as India, with the ambition of combining rising population with rising income levels for a while longer, is obviously well advised to tap into all available resources, domestic and abroad. In both cases, this means to recognise that energy markets may well be big and complicated and slow moving, with their huge project sizes and long-gestation periods. But at the end of the day, they are only markets and so they follow the same principles as any other market. In the case of domestic production, this means to recognise the importance of market prices and competition in attracting the investment India needs. Producers will not produce if they can’t make a profit; and to prevent monopolies from exploiting the country’s needs is best done through competition. Similarly, consumers will always consume more if energy prices are cheap and subsidised than at international market prices; while energy poverty is best prevented by income transfers, not blanket subsidies. But I think the government knows all this and is on its way to graduallychange the landscape accordingly. 

What is the future of unconventional energy sources such as solar, wind or tidal? Will they continue to remain marginal in the foreseeable future?The basic problem for renewables is that as a sector they are still dependent on financial and policy support. Some renewable sources can compete, for example onshore wind in the best locations or solar power in Southern Italy, where there is plenty of sunshine and conventional electricity is expensive. But generally, it is a subsidised sector. If any subsidised fuel expands faster than its costs come down, subsidy payments have to increase to sustain the expansion. Such a process has its limits. 

CRUDE OIL: Rupee Plays Spoilsport

Stocks of state-owned oil companies were battered on Wednesday as oil prices rose in the global markets while the rupee once again fell below 60 against the dollar. The marginal increases in the price of diesel every month are inadequate and the industry’s under-recoveries are once again seen as rising.
“There has been a significant rally in crude oil prices in the last few days as they hit a 14-month high at NYMEX and a 5-year high in domestic bourses amidst tensions in the Middle East, which raised concerns about supply disruptions, and with market expectations of a sharp drop in crude inventories in the United States, the world’s top oil consumer,” says Sugandha Sachdeva, AVP, Energy Research, Religare Securities.
The petroleum ministry announced recently that under-recoveries on diesel have crossed 8 per litre and the industry’s daily losses have shot up to 358 crore — its highest level this fiscal. The three oil marketing companies together are expected to post under-recoveries of close to 28,000 crore for the April-June ’13 quarter, which may go up if the rupee and crude oil continue their northward course.

Reliance Inds may be on Course to Emerge as a Value Creator

Over the past six years, the stock of Reliance Industries, controlled by India's richest man Mukesh Ambani, has languished especially after the fall in the company’s gas output from its offshore field.
The government’s decision last week to increase the price of natural gas from $4.2 per British thermal unit to $8.4 from April next year could well be the trigger for the stock’s breakout. What should also help is the rising output and revenues from its investment in shale oil and gas in North America and expansion of its retail business and 4G services in telecom. Revenues from its retail business have already topped . 10,000 crore and the company now wants to raise its share of revenues from these two relatively new businesses to diversify.
The new natural gas pricing formula based on the recommendations of a committee headed by C Rangarajan, who heads the PM’s Economic Advisory Council, will come into force from April 1. That will mean the benefits will start accruing from FY15. The consensus estimate on RIL’s FY15 earnings is close to . 80 per share — an annualised growth of over 11% over . 64.5 for FY13.
Apart from higher prices for the natural gas produced by the company from its Krishna Godavari D6 block, RIL should also start deriving benefits from its investments in the refining and petrochemicals businesses. At the company's recent shareholders meeting, Mukesh Ambani had said that the conglomerate would pour in $27 billion over three years across all its businesses. This should lead to doubling of operating profits within five years.
RIL will also be a major beneficiary of the government's decision to raise customs duty on polymers in May 2013 and the introduction of a 15% investment deduction allowance in Budget 2013-14.
But what will keep RIL’s potential gains under check is stagnating production in its offshore field. Production from the KG basin has fallen below 15 MMSCMD and any significant improvement in output will take time. Barclays Capital reckons that there could be a rebound in FY15 although material increases will come only in 2016-17, it says.
A Kotak Securities report also echoes this view saying that EPS accretion could be meaningful at higher levels of gas production. The brokerage expects higher output from FY17E onwards led by commissioning of satellite fields. Going by the recent decision of the government, the price of natural gas will be revised on a quarterly basis based on a formula. The pricing formula is linked to India’s imported gas prices. This will mean that gas prices should move up in the medium-term since India’s longterm contract with RasGas will see annual revisions and higher-priced LNG imports from Gorgon in Australia will kick off in 2014-15.
The increase in gas price eliminates a key regulatory overhang. The change in tide for one of India’s top companies by revenues and profitability is reflected in the movement of its stock share, which has gained nearly 17% in the past year outperforming the gain of 11% gain in the benchmark Nifty. This is at odds with its under-performance since 2008 and is perhaps an indicator that RIL may be on course to emerge as a value creator for long-term investors.

Long-term PPAs to Save Utilities from Big Shock

HIKE IN NATURAL GAS PRICES: GROWTH TRIGGER FOR SOME, WHILE OTHERS FACE A HIT 

The revision in gas prices, which comes into force from April 2014, will have a marginal impact on power utilities such as NTPC, Reliance Power, GMR and GVK Power, thanks to the long-term power purchase agreement (PPA) with distribution companies. After the new gas price, the power bill of state discoms is likely to rise by just 3.5%, which in absolute numbers works out to $1.2 billion (. 7,000 crore). This may well be absorbed but given their poor financial health, distribution companies may need an additional subsidy from the government. 
Power producers, which sell power on longterm contracts, are likely to see a marginal impact on their earnings as in most contracts the fuel cost is a pass-through. What the government will need to ensure is that the state electricity boards are able to purchase power at higher costs. For most of them, gas-based plants form only 10-15% of their total power producing portfolios. But as power becomes more expensive, these companies may have to reckon with lower volumes though there is a comfort in that discoms will have to ensure at least a RoE of at least 15.5%.
Among gas-based power producers, stateowned NTPC will be the least less impacted as it has the entire capacity tied for longterm contracts with a fuel cost passthrough. However, GMR Infra and GVK Power, which plan to sell 20-25% power in the open market, will see a slightly higher impact. For these companies, gas-based capacities are higher than that of NTPC. NTPC’s gas-based capacity is only 12% of its total portfolio, while for GMR Infra and GVK Power it is over 25%. Reliance Power also has a 2,400 MW gas-based plant, which
    is still not operational. 
Another key consumer of domestic natural gas is the urea industry. The governmentmandated market price of urea is way below the cost of production, thus making it necessary to provide subsidies to producers, too.
For the industry, the feedstock cost is a pass-through. So, the rise in domestic gas prices will have no impact on the operating profit of fertiliser players. However, the industry’s working capital position could be stretched as the government typically delays subsidy payments, which leads to higher interest costs. Credit rating agency Crisil estimates that a rise in interest cost will lead to a 30-40 bps decline in net profit margins of urea manufacturers, assuming other things remaining constant. The government has already indicated that it will continue to subsidise these industries. If that happens, it will benefit all gas-based plants which are operating below 20% due to the fall in domestic availability of gas.