Banning coal gasifiers in Morbi cluster to impact tile industry: ICRA

The National Green Tribunal (NGT), in its order on March 6, 2019, directed closure of ceramic units running on coal-based gasifiers in the Morbi region. According to the order, units need to dismantle all type of coal gasifiers, even if they were complying with the earlier set pollution control norms, and adopt PNG as a fuel to continue their operations. The NGT, through this order, seeks to control the deteriorating air and water pollution in the Morbi-Wankaner region.The Morbi cluster in Gujarat is the largest tiles manufacturing zone in India and accounts for nearly 75-80 per cent of India’s tiles and sanitaryware products in volume terms, with more than 800 tile factories in the region. Almost 450-500 units of the total units will take a hit as their operations are largely dependent on coal gasifiers. Among these units, those most affected will be the wall tile and soluble salt tile manufacturers as they were meeting nearly their entire thermal energy requirements through coal gasifiers. While the overall production should not get materially impacted due to easy availability of gas connection in the region, the switch from coal to PNG will increase the fuel expenses for players due to the higher cost of PNG in comparison to coal.Throwing more light on this aspect, Suprio Banerjee, Vice-President and Head, Mid-Corporate ratings, ICRA said, “Based on the existing price differential between the coal and the PNG on energy equivalent basis, ICRA believes that switching to PNG as a fuel source will increase the fuel expenses by 10-15 per cent, which will directly impact the operating margins by 2-3 per cent in absence of any price hike. Moreover, the working capital intensity will also increase due to the lower credit period available on PNG purchase than that of coal purchase. The industry is already working capital intensive in nature and the additional burden will put further pressure on the liquidity of the affected players.”The tile industry has already seen sharp price correction of around 30-40 per cent over the past 18 months because of significant capacity addition in the Morbi region and slowdown in the real estate sector. This coupled with the increase in gas price has eroded the overall profit margins of the tile players over the last 12-18 months. The industry players expect a price hike across product segments, in line with the expected increase in fuel expenses, to arrest any further deterioration in profitability. However, the sustenance of an industry wide price hike could be a challenge because of the surplus capacity in the industry. Further, ICRA believes that any such price hike by affected units would enhance the profitability of players already using PNG.Ankit Patel, Assistant Vice President and Co-Head, Corporate ratings, ICRA said, “The ban on usage of coal gasifiers is a credit positive for the sole PNG supplier operating at Morbi-Gujarat Gas (GGL). Currently, GGL’s PNG sales in Morbi are about 2.5 mmscmd. In the past 3-4 years, volumes of GGL in Morbi have come down from the peak levels on account of the increased usage of gasifiers. Volumes could witness a significant increase by 30-40 per cent in the near term as players will have to switch immediately to PNG. Over the long-term, if the ban continues, it augurs well for GGL’s PNG volume stability and growth as there aren’t many economical and environmentally acceptable alternative fuels to replace PNG. The only risk over the long-term to GGL would be on account of its exhausted marketing exclusivity in the region. If third party marketers enter into supply contracts with the industry players or a group of industry players at Morbi, GGL could lose PNG volumes to them even though it will derive income from the network charges.”