MANAGEMENT DISCUSSION & ANALYSIS The Management Discussion & Analysis is as under: INDUSTRY STRUCTURE & DEVELOPMENT Natural Gas is been used as a fuel since more than a century, but the emergence of Natural Gas as a brferred, clean and safe energy solution has been brvalent only in the last couple of decades. This year Gujarat Gas Limited (GGL or the Company) faced major challenges due to the increasing volatility in the global crude oil prices. The crude oil price (Indian Basket)1 has fallen by around 50% since the beginning of the year, when it was around $100+ a barrel. This comes after nearly five years of stability. The oil price is partly determined by actual supply and demand, and partly by expectation. Even though this global volatility of crude created competition for Natural Gas from polluting fuels, however Natural Gas continues to emerge brferred fuel and remain a vital energy source amongst various available resources in world's energy consumption and by most of the Company's environment conscious customers. It is one of the cleanest conventional fuels with very low level of greenhouse gas emissions in comparison to other conventional sources. Natural gas is traditionally consumed in the residential, commercial sectors, mostly for heating in the transport sector and in the industrial sector - sometimes industrials such as fertilizer producers use Natural Gas as raw material, and in the power sector. The Petroleum and Natural Gas Regulatory Board (PNGRB) which governs and regulates the downstream gas industry is actively contributing in the growth of City or Local Natural Gas Distribution (CGD) sector by awarding licenses to lay, build, operate and expand CGD business in new geographies including Bhavnagar, Jamnagar, Kutch (East & West) for the round - 3 of CGD bidding and nine new geographies in the round - 4 of CGD bidding including Amritsar, Bengaluru Rural and Urban Districts, UT of Dadra and Nagar Haveli, UT of Daman, Ernakulam, Panipat, Raigarh, Thane and Pune. Continuing its endeavor for developing more CGDs to foster growth and development of the sector, the PNGRB has been inviting competitive bids for developing gas infrastructure including development of new cross country pipelines and CGD networks in the country. With the expected spurt in the expansion of Natural Gas infrastructure in coming years including additional Regasification terminals being erected and commissioned, nationwide cross country pipeline grid being laid and new CGD licenses being issued the reliance of Natural Gas as a primary source of energy in the overall energy basket is envisaged to increase drastically by the end of the current decade and thereafter. OPPORTUNITIES AND THREATS The Ministry of Petroleum and Natural Gas (MoPNG) and the PNGRB have sent positive signals to the sector with bundle of sops through their policy directive and also by offering new areas for bidding with a concentrated effort to give the much needed boost to the sector. The MoPNG has issued a revised directive for 100% allocation of indigenous (domestic) gas to the CGD sector to boost the demand of CNG (transport) and household (domestic segment) for sustainable growth. While, the quantum of the domestic source available with the Company was reduced as an arrangement to adhere to this directive issued by the MoPNG, however the Company has benefitted by securing replacement gas volumes from another domestic source, that is cheaper and assured, supporting sustainable future growth of CNG and household markets, which would have otherwise been challenging to develop with RLNG as source of supply. Further the MoPNG and PNGRB, both review the continuous growth and progress of the sector thereby ensuring structured growth and development all across in the sector. The PNGRB issued the tentative list of 71(41 immediate and 30 subsequently) upcoming CGD areas in the last quarter of the brvious calendar year and out of which 20 new geographies have been offered for bid. The PNGRB is aggressively looking for the roll out of the CGD development plan across the length and breadth of the country. This give ample opportunity to the Company which has immensely experienced technical and commercial resources in the gas markets to lead this market from the front. The Company is actively evaluating the geographic areas for bid in order to expand its horizon for growth. The enduring focus of the Company continues to be on the strong industrial growth coupled with well penetrated brsence of gas transportation network and an encouraging business environment attracting large investments in the state of Gujarat. The state and union budgetary announcements indicate plans for significant additional investments in manufacturing and urban facilities. It is expected that these investments will continue to fuel further growth of the CGD sector in Gujarat in the near to medium term. The volatility in the global crude oil prices impacted the overall stability maintained during the last five brceding years. The Company was also wedged due to the unexpected steep decline in the oil prices which made the alternate conventional polluting fuels cheaper temporarily eating away some portion of the key industrial sector. The Company could however bravely sustain the tempest due to its strong parentage and the depth & quality of the customer profile couple with optimal gas sourcing decisions. The reliance on imported fuel continued during the brceding year had ensured the gas supplies inspite of the continuous decline in the available indigenous domestic gas and no new major gas finds in the country. The demand of Natural Gas is expected to rise going forward and reinstate the loss of volume in the near future as the volatility is expected to stabilize soon. GGL experienced the major volatility in the crude oil prices that was ever encountered in the recent past. This impacted the sales of industrial volumes temporarily on account of few industries switching to cheaper alternates though the same is not expected to sustain for long. The optimal sourcing mix and affordable product pricing is expected to reinstate the volumes lost along with an anticipated growth through greener pastures. GGL continues focus on placing Natural Gas to affordable markets and has set-up an internal application development center and endeavors improving fuel efficiencies in certain processes targeting to regain the loss volumes and also fuel growth by adding new industries currently using alternate fuel. FUTURE OUTLOOK The demand for Natural Gas is expected to increase going forward to satiate the ever increasing energy needs in the country. Natural Gas having the merits of being a brferred fuel over the conventional polluting fuel due to its efficiencies and economies coupled with the advantage of the boost from the policy directive is expected to impact the demand of the sector positively. The emphasis on infrastructure development through aggressive roll out by the Regulatory body gives further impetus for the growth of the sector. The global volatility in crude prices is expected to settle down sooner than later to further add to the demand in near future. The Company would continue its focused efforts on growth of volume across its segments of residential, commercial, transport and more specifically in industrial segment through expanding further in the existing areas of operations as well as in thegreen field opportunities secured through competitive bidding. RISKS AND CONCERNS 1. Availability of natural gas and price In the dynamic natural gas market, the assured supply of gas at competitive price will always play an important role for the growth and development of robust downstream sector. With the advent of new gas pricing mechanism coupled with 100% allocation of domestic gas to CNG and PNG (domestic) segments the economics of switching to gas becomes more attractive for the end consumers, which in turn is expected to drive growth in consumption. The gas demand of the commercial and industrial segments is met by the costlier RLNG which has its linkage to the global volatility of availability and price. 2. Gas pipeline connectivity: A CGD company has to depend on the transmission pipeline company, the bargaining power of the CGD entity with respect to the transmission pipeline company remains limited, given the much larger size of the later. Besides, once pipeline project commences, , laying of new pipelines might get delayed due to several reasons including delay in securing right of use (ROU), delays in approvals, local activism etc. 3. Regulatory Regime The Petroleum and Natural Gas Regulatory Board (PNGRB) which has been constituted under the Act notified by the Parliament, governs and regulates the downstream gas industry through various notified bylaws, guidelines, etc. for growth and sustenance of the downstream gas business. In an endeavor for developing more City or Local Natural Gas Distribution Networks (CGD) to foster growth and development of the sector, the PNGRB has been inviting competitive bids for developing gas infrastructure including development of new cross country pipelines and CGD networks in the country. This would make the overall business environment very competitive. 4. Statutory & local administrative approvals The implementation and operation of a CGD network requires a host of approvals from a number of agencies. Obtaining such multiple approvals from various statutory and local administrative authorities consumes enormous time of the ever scarce resources leading to possible delays in execution and value realization and maximization; however the Company manages the same to an extent by way of advance planning. INTERNAL CONTROL SYSTEM AND ADEQUACY The Company has a proper and adequate system of Internal Controls commensurate with its size of operations and nature of business. The Company's Internal Control Systems are further supplemented by extensive programs of audits, i.e. Internal Audit, Proprietary Audit by the Comptroller & Auditor General of India (C&AG) and Statutory Audit by Statutory Auditors appointed by the C&AG. The Internal Control System is designed to ensure that all financials and other records are reliable for brparing financial statements and other data and for maintaining accountability of assets and compliance with statutory requirements.The Company has mapped a number of business processes on to SAP system, thereby leading to significant improved controls & transparency. Your Company also continues to invest in Information Technology to support various business processes. FINANCIAL AND OPERATIONAL PERFORMANCE The Company through its aggressive expansion plans is committed to reach out to every possible natural gas user in its expanded geographical area, which now comprises of close to 19 districts. Recently, your Company has won the bids for developing gas distribution network in Thane GA and Dadara and Nagar Haveli and also commissioned Jamnagar and Bhavnagar GA. The net profit after tax for the year increased to Rs. 443.58 crores from Rs. 28.43 crores in the brvious year. The Company had healthy net cashflows from operations of Rs. 1179.81 crores during the year. Investments were made in extension of pipeline network to reach new areas and in reinforcements and upgradation of existing network as required. Investments were also made to connect residential customers and augmenting the CNG infrastructure. Investments were also made to upgrade the IT infrastructure of your Company to enhance reliability and enable scalability. Appropriate provisions have been made in the accounts wherever necessary for contingencies, bad debts and diminution in value of investments. No amount has been transferred to the General Reserve during the year. HUMAN RELATIONS AND PARTICULARS OF EMPLOYEES Your Company employed 1083 employees as on 31st October 2015. Your Company has a focus on building capabilities and developing competencies of its employees. The Company believes that training and personnel development is of vital importance to create a climate where people maximize their technical skills and inner potential which can help the Company in capitalizing the emerging business opportunities through their involvement. During the year, employees were sent for various training programs and seminars to enhance employee skills/knowledge. The Company has in place an attractive policy of performance linked incentive to encourage and reward employee performance. There was no strike or lock-out during the year under review. |