Management Discussion and Analysisforming part of the Directors’ Report for the year ended on 31st March, 2011.
Annexure - I
A. INDUSTRY OVERVIEW
Energy has been universally recognized as an important driving force for economicgrowth and human development in any country. There is a strong mutual relationship betweeneconomic development and energy consumption. On one hand energy promotes the scale andpace of economic development and on other hand growth of an economy, with its globalcompetitiveness, hinges on the availability of the cost efficient and environment friendlyenergy sources.
India, comprising of over 17% of the world’s population is a significant consumerof energy resources. India’s economy grew at an average rate of 7.8% p.a. which inturn has led to the growth in primary energy consumption at a Compounded Average GrowthRate (‘CAGR’) of over 6.5% from 2006 to 2010 (Source: BP Statistical Review ofWorld Energy, June 2011 ).
Coal, oil, and natural gas are the three primary commercial energy sources in India.India’s energy mix has coal as a major contributor ( 53%), with power generationbeing predominantly dependent on coal. The share of oil is currently 30% in the overallenergy mix. The share of natural gas is currently 11% (Source: BP Statistical Review ofWorld Energy, June 2011) in the overall energy mix of India, and with gas becoming the‘preferred fuel’ for industries, the latent potential for gas remains very largein the country.
The current per capita energy consumption of the country is projected to improve intandem with the economic growth and subsequent increase in demand for energy.
Increasing pressure of population and increasing use of energy in different sectors ofthe economy is an area of concern for India. Predominantly, India has been a gas-starvednation. At present, the consumption of natural gas in India is driven by gas supplies.Also, gas consumption and infrastructure are mostly confined to a particular region of thecountry, i.e. the western region due to its proximity to gas sources. Hence, whateverquantum of gas comes into the market continues to be absorbed by the consumers.
In fact, Gujarat alone accounts for almost 1/3rd of the total natural gas consumptionin India; of which around 25 mmscmd comes from LNG on Term as well as Spot basis. Owing towidespread development of gas infrastructure in the State, including gas transmissionpipelines, LNG terminals and CGD networks, Gujarat has one of the most developed marketsfor Gas in India, with several industrial and CGD companies relying on imported LNG formeeting their gas requirements.
Currently, Gujarat has one of the most developed gas transportation infrastructure inthe country, comprising inter alia, GSPL’s gas grid of 1874 km covering 18 out of 26districts. GSPL has made rapid strides as a natural gas transportation company over years.
Ironically, India has been facing capacity constraints in terms of energy /pipelineinfrastructure since a long time. For an emerging economy like India, such capacityconstraints would act as an impediment for development of natural gas market which isstill at a nascent stage.
The Government of India set up a High level Committee on Allocation of NaturalResources (chaired by Shri Ashok Chawla) in February, 2011 for looking at possible reformsin the allocation process. The Ashok Chawla Committee submitted its Final Report andimportance of pipeline infrastructure has been highlighted in the said Report as under:
"It should be easy to buy, sell and use the commodity being traded. For gas, thismeans a good nation-wide transportation and distribution infrastructure, which iscurrently missing. Without such infrastructure, a national gas market will not exist. TheCommittee’s opinion is that the most critical need in the medium term, therefore, isthe rapid development of a national gas grid and gas distribution infrastructure. WhilePNGRB has begun this process, it would be good to expedite this. Of course, it goeswithout saying that such infrastructure development should be undertaken in a fullytransparent manner."
Typically, infrastructure has been developed based on supplies and mostly demandcentres near the supply sources were catered to. The same resulted into region centricdevelopment of network.
Gas pipelines play a critical role in matching the supply and demand of natural gas.Your Company forayed into this business with the philosophy of leading demand rather thanchasing the same, thereby making huge investments in newer markets. Your Company stagedits development in such a manner that not only did it reach all key gas consuming areas ofGujarat, it also attempted to develop its pipeline network by serving a diversified rangeof customers and thereby tapping the huge latent demand.
Your Company believes that it is very important to capture such latent demand in thecountry, and the same is possible only through development of pan - India pipelines.Moreover, access to natural gas has a multiplier effect on the economy, as growth inindustrial development leads to creation of employment while availability of gas fordomestic, commercial and transport sectors helps in reducing burden on Government coffersin the form of subsidies.
Hence, it is based on this premise that your Company finds it important to plan aninfrastructure capacity well in advance with a sufficient margin for peaking demand.
Accordingly, your Company is poised to expand its reach in markets outside Gujarat,through the 3 cross-country pipelines for which it was recently awarded Letters ofAuthorization by the Regulator (PNGRB), namely: Mallavaram - Vijapur - Bhilwara pipeline (approx 1585 kms), Mehsana - Bhatinda pipeline (approx 1670 kms) and Bhatinda - Jammu -Srinagar pipeline (approx 740 kms).
B. REGULATORY FRAMEWORK
Government of India ("GOI") in May 2006 enacted the Petroleum & NaturalGas Regulatory Board Act, 2006 with a primary objective of protecting the interest ofconsumers and entities engaged in specified activities to ensure uninterrupted andadequate supply of petroleum, petroleum products and natural gas in all parts of thecountry and promote competitive markets in oil and gas sector of India.
The Petroleum and Natural Gas Regulatory Board (PNGRB) was constituted and notified byGOI with effect from 1st October, 2007. PNGRB has also notified Regulationsconcerning various aspects of transmission pipeline.
Notification of Section 16 of the PNGRB Act on July, 2010, has led to expediting of thebidding process for the natural gas pipelines and CGD networks.
However, there were concerns over the ability of PNGRB to issue final authorizations toentities under Section 16 of the PNGRB Act, 2006 in view of the Restrictive Order passedby Supreme Court in March, 2010. However, the Supreme Court has modified the said Order inMay, 2011 and has clarified that upon notification of Section 16, PNGRB has authority toissue final authorizations.
PNGRB is likely to authorize the existing & proposed pipeline network of yourCompany in Gujarat. Your Company has also submitted the tariff details to PNGRB forfinalization.
PNGRB has shown commitment to introduce natural gas usage in number of cities. Tilldate, four rounds of the CGD bidding covering around 29 cities across the country havebeen initiated by PNGRB. This would encourage investments in the sector and furthercontribute towards increase in usage of natural gas.
C. OPPORTUNITIES AND CHALLENGES
Your Company believes that to maintain and sustain the economic growth achieved in thepast few years, our country needs infrastructure to ensure commercialization of gas finds.Moreover, gas being brought into the country through LNG terminals also needs to reachremote towns in order to provide equal benefit of the fuel to the common man. Growth inpipeline networks in the country, which in turn lead to setting up of CGD networks, areessential to guarantee overall progress of a nation in terms of economic and industrialprogress coupled with taking care of environmental concerns.
Ideally, pipeline capacities should precede the gas supplies and for an energydeficient country like India, demand would certainly not be a critical issue. Capacityconstraints would act as an impediment for development of natural gas market which isstill at a nascent stage.
Currently, natural gas transmission infrastructure in India is approx 10000 kms and isrestricted only to a few States namely: Gujarat, Maharashtra, Madhya Pradesh, UttarPradesh, Haryana, Rajasthan, NCR, Assam, Tamil Nadu, Andhra Pradesh and Tripura.
Transmission through pipelines is and shall remain the preferred mode for natural gasas it is the most efficient and safest way. To ensure widespread availability of naturalgas, it is becoming increasingly necessary to develop pipeline infrastructure.
Pipelines play a critical role in matching the supply and demand of natural gas andyour Company believes that development of pan-India pipelines would exploit gas supply anddemand growth in India and unleash a huge growth potential. There are several sectors likepower & industrial which would benefit from the usage of the environment friendlynatural gas and it is very important to capture such latent demand. This would be helpfulin overall balanced development of gas markets and consumption in the country.
At the same time developing pan-India pipeline infrastructure, including in remoteareas, will be a challenge for your Company as this would be its first venture outsideGujarat.
Your Company is well poised to take full advantage of the new opportunities arising outof the developments happening in the gas industry.
D. OPERATIONS AND FUTURE OUTLOOK
Your Company owns and operates the largest gas transmission network in Gujarat totalingto approx 1874 kms. The gas grid of the Company has reached to 18 out of 26 districts inGujarat. Your Company has been successful in reaching remote industrial / coastal areas ofGujarat thereby enabling supply of natural gas to all major industries spread acrossregions in the State.
Further, your Company has signed long term contracts with various customers acrossseveral sectors, for transmission of gas from various sources like from RIL KG Basinfields, LNG terminals at Dahej, Hazira etc.
Pro-active development of gas transportation infrastructure has not only helped indevelopment of the market but also in monetization of the gas fields as well ascommercialization of LNG terminals & your Company would continue its effort in thisdirection.
Your Company is continuing expanding its network including development of severalspurlines to connect remaining industrial clusters and medium size customers along thepipeline network in Gujarat in order to facilitate the growth of the Company as well theindustries across the State. The Company expects to implement further 3000 kms ofpipelines in future subject to timely receipt of all applicable statutory approval.Further, augmentation of existing pipeline network is required due to increase in the gasdemand and emergence of inter-state pipeline from GSPL gas grid such as at Mehsana.
The emergence of new supply regions and sources necessitates the development of anational interconnected pipeline network. Commercialization of gas sources in the eastcoast region of India has led to an improvement in availability of gas and the same isexpected to increase further.
Accordingly, your Company in a consortium with IOCL, BPCL and HPCL had submitted bidsto PNGRB for setting up three cross-country natural gas transmission pipelines, namely:Mallavaram - Vijapur - Bhilwara pipeline (approx 1585 kms), Mehsana - Bhatinda pipeline(approx 1670 kms) and Bhatinda - Jammu - Srinagar pipeline (approx 740 kms). GSPL ledconsortium has emerged as the lowest bidder for the said pipeline projects. PNGRB has alsoissued Letters of Authorization in respect of these three pipelines on 7thJuly, 2011.
The development of the said pipelines is of immense economic interest for the countryas these would make gas available for industries and transportation (CNG) as well asresidential consumers in around 100 cities across the States of Andhra Pradesh,Maharashtra, Madhya Pradesh, Gujarat, Rajasthan, Haryana, NCR, Punjab and Jammu &Kashmir, most of which do not have pipeline connectivity as yet. These pipelines also holdsignificant value to GSPC Group, on the whole, as these open up a gamut of opportunitiesfor gas trading / marketing, gas transmission, gas distribution and import of LNG.
However, the authorizations to the said pipelines have been challenged in Supreme Courtof India. Though the decision is pending in this matter, till date no adverse interimorder has been passed against the Company in this matter in this relation.
Your Company is likely to submit its Bid for the bids invited by the PNGRB fordeveloping a pipeline of around 1500 kms from Surat in Gujarat upto Paradip in Orissa.
Moreover, your Company holds significant equity interest in CGD companies, which havenatural synergy with gas transmission business. GSPL holds 13.75% in Sabarmati Gas Ltd.and 36.59% in GSPC Gas Co. Ltd.
It is noteworthy to mention that Sabarmati Gas Ltd. and GSPC Gas Co. Ltd. together areamong the largest CGD networks in the country. Your Company expects that with theexpansion of gas transmission pipelines and CGD infrastructure, these CGD companies wouldalso continue to grow.
E. PERFORMANCE PROFILE
The Company continues to expand its gas grid to reach new markets and connect to newsupply sources.
The infrastructure put up by the Company enabled the flow of LNG and domestic gas fromvarious sources including KG Basin to reach various regions of Gujarat.
The Company has managed to achieve fast track growth in a short period of time with alean manpower strength on account of its well thought out strategy of developing majorpipeline projects on EPC (Engineering, Procurement and Construction) Model.
The Company transported 13009 mmscm of natural gas during the year, recording anincrease of 11% over last year’s volumes transportation of 11673 mmscm.
Income from transportation of gas for the year was Rs. 1,025.21 crore, an increase of3% over last year’s figure of Rs. 991.95 crore.
Profit after Tax for the year was Rs. 506.38 crore as compared to Rs. 413.77 crore inthe previous year, recording an increase of 22%.
The Net Worth of the Company has increased from Rs. 1,563.48 crore to Rs. 2,004.75crore as compared to previous year. During the year, Gross Block of Assets increased fromRs. 3,325.49 crore to Rs. 4,193.53 crore.
The Company continues to have a healthy Debt Equity Ratio of less than 1.
Wind Power Project
Your Company believes that renewable energy sources can offer enormous economic,social, and environmental benefits and India has the highest potential for effective useof the renewable energy sources like wind power.
Considering the cost benefit which a wind power project can offer, your Companyventured into and has successfully completed commissioning of the wind power project of52.5 MW at Maliya - Miyana, Rajkot and Gorsar - Adodar, Porbandar in the State of Gujarat.The Company has generated 3,90,22,223 units of power from the same which resulted in therevenue of approx Rs. 13.89 crore in the year.
F. RISK MANAGEMENT AND INTERNAL CONTROL SYSTEMS
The Company has a well-defined risk management framework. The Board of Directors of theCompany has adopted a risk management policy, reviewed the Risk Register and put in placea framework for reviewing the major risks. The Company is focusing on development of a"risk culture" that encourages all employees to identify risks and associatedopportunities and to respond to them with effective actions.
The Company has a proper and adequate system of internal controls commensurate with itssize of operations and nature of business. The Company’s internal control systems arefurther supplemented by extensive programs of audits, i.e. internal audit by anindependent firm of Chartered Accountants, proprietary audit by the Comptroller &Auditor General of India (C&AG) and statutory audit by Statutory Auditors appointed bythe Comptroller & Auditor General of India (C&AG). The internal control system isdesigned to ensure that all financials and other records are reliable for preparingfinancial statements and other data and for maintaining accountability of assets andcompliance with statutory requirements. The Company has mapped a number of businessprocesses on to SAP system, thereby leading to significant improved controls &transparency.
G. HUMAN RESOURCES
During the year, the Company did not experience any strikes or lockouts.
The increasing human capital aspirations are a major challenge for the Company. Inorder to remain competitive it is imperative that Company has to hire and retainsufficient number of skilled talent so as to strengthen its technical and projectmanagement skills.
The Company employed 162 employees as on 31st March, 2011 (Previous year:141 employees).
The Company believes that training and personnel development is of vital importance tocreate a climate where people maximize their technical skills and inner potential whichcan help the Company in capitalizing the emerging business opportunities through theirinvolvement. During the year, employees were sent for various training programs andseminars in line with the Annual Training Calendar to enhance employee skills/knowledge.
The Company has in place an attractive policy of performance linked incentive toencourage and reward employee performance.
Moreover, apart from introducing GSPL ESOP - 2010 for all the employees of the Companyduring the year, your Company has introduced the Own Your Vehicle Scheme for the benefitof the employees at Gandhinagar.
The Company has managed to achieve substantial growth with a lean organizationstructure.
Forward Looking Statements:
This Annual Report contains forward-looking statements, which may be identified bywords like will, believes, plans, expects, intends, estimates or other words of similarmeaning. All statements that address expectations or projections about the future,including but not limited to statements about the Company’s strategy for growth andmarket position are forward-looking statements. Forward-looking statements are based oncertain assumptions and expectations of future events. The Company can not guarantee thatthe assumptions and expectations are accurate or will be realized. The Company’sactual results, performance or achievements could differ materially from those projectedin any such forward looking statements. The Company assumes no responsibility to amend,modify or revise any forward looking statements, on the basis of any subsequentdevelopments, information or event.