MANAGEMENT DISCUSSION AND ANALYSISSHRI SHAKTI LPG LTD (SSLPG) has been engaged in the business of LPG marketing. Themanagement discussion and analysis given below discusses the key issues concerning the LPGindustry in general and SSLPG in particular followed by the recent developments whereinthe company decided to diversify into power and infrastructure under the new identity ofSHRI MATRE POWER AND INFRASTRUCTURE LTD (SMPIL).
INDUSTRY STRUCTURE AND DEVELOPMENTS :
LPG marketing was the monopoly of the Government Oil Companies who had piled up a hugewaitlist. The Government of India in 1993 permitted the private sector participation witha commitment that the subsidy enjoyed by the Government Oil Companies would be removed ina phased manner in the next few years. It had also committed that the commercial andindustrial LPG markets in India would be reserved exclusively for the private sector, tillthe subsidy withdrawal in the domestic sector is completed. None of the promises wereimplemented as a result of which the private sector companies were unable to run the LPGbusiness on a profitable basis due to the total absence of the level playing field.
The Government of India even failed to implement its G.O. Ms. No.224 dated 27thNovember,1997 wherein the Government committed phased withdrawal of subsidy on LPG over aperiod of 3 years ending with March, 2001. This was subsequently shifted to end of March,2002. Because of Government’s failure to honour its commitments as above and theconsequent absence of level playing field, the entire private sector industry was badlyaffected and became loss making. The Ministry of Petroleum issued a notification statingthat the subsidies on LPG and Kerosene will be removed in a phased manner by the year 2007only. However, the same is yet to be implemented.
SSLPG were the pioneers in the field of LPG marketing and established large integratedinfrastructure to carry LPG from dock (Port) to the door of customers, which consisted ofdedicated port facilities, large storage terminals, network of bottling plants anddistribution and marketing networks. Your company was able to do well from thecommencement of commercial operations in 1995 till 1999 and became profitable. Infact yourcompany emerged as the country’s largest private sector LPG Company. However, due toabnormal rise in crude oil prices during 1999 to 2000, the international LPG prices alsoshot up. Despite the big spurt in sourcing costs, it was not possible to proportionatelyincrease the prices due to competition with the Government Subsidized gas by virtue ofwhich the company incurred losses. This was further aggravated in the subsequent years dueto the growing disparity in the prices between the private LPG operators and the PSU OilUndertakings, on account of non-removal of subsidy as mentioned earlier. Because yourcompany’s dedicated customer base was much larger, it had to suffer greater losses asmore sales meant more losses. Inspite of the difficult times, the company built a strongbrand image viz., SHAKTI GAS which is still quite popular.
SSLPG entered into LPG Auto Fuel market and developed for the first time patentedtechnology for converting the 2 stroke engines of both 3 wheelers and 2 wheelers to run onLPG in collaboration with Automotive Research Association of India (ARAI). In June, 2007,SSLPG received two patents jointly with ARAI for the above. The Government of India whichagreed in principle to permit LPG as auto fuel, took a very long time to enact thelegislative amendment. The highly potential auto fuel market which was to open by 1998,was not available till recently due to delay in finalization of norms by the Governmentand setting up of adequate number of LPG dispensing stations.
OPPORTUNITIES AND THREATS :
Your company has taken up a three pronged strategy for its turn around which was asfollows :
a) One Time Settlement (OTS) with term loan, working capital lenders and unsecuredloans wherein the entire accumulated interest along with considerable part of theprinciple amount is waived.
b) Tie up financial arrangements to raise the amounts required for meeting the OTScommitments.
c) Marketing Action Plan to aggressively sell LPG in the commercial, industrial andauto fuel markets in addition to extensive and accelerated marketing of Shakti Gas AutoKits in all the cities where it is mandatory to convert three wheelers to run onenvironment-friendly fuels at the earliest.
SSLPG achieved a major breakthrough when the company paid off all the term loans andworking capital liabilities under the One Time Settlement (OTS) deal, wherein the Banks& Financial Institutions agreed to waive the interest and considerable part of theprincipal and accept the balance in full & final settlement of their term loans andworking capital loans. The company got a very good deal from all the three banks &Financial Institutions based on our strong contention that the company from the positionof the acknowledged leader of the private sector LPG Industry, fell down and became lossmaking and sick only because the Government did not honour the commitments given toprivate LPG industry.
OUTLOOK :
As could be seen from the above, the Company had been badly let down by the Governmentof India who did not honour its commitments given to the Private Sector LPG Industry.Despite the best efforts being put in by all the team members, the company is not able tomake much progress in reviving its LPG Business. It is primarily due to the fact that theGovernment could still not do much to withdraw the subsidy on LPG as committed by it. Overthe years, the subsidy has further ballooned thereby substantially enlarging the gapbetween government subsidized gas and the private sector non subsidized gas.
As the future prospects in LPG business do not seem to be bright enough, it is decidedto diversify.
In India electricity is always in short supply. Despite the increase in new powergeneration plants, the gap between demand and supply has not reduced. The average percapita consumption of electricity in India is about 700 kwh which is far below the Worldaverage of 2300 kwh. The Indian government has set ambitious goals in the 11thplan for power sector owing to which the power sector is poised for significant expansion.In order to provide availability of over 1000 units of per capita electricity by year2012, it has been estimated that need-based capacity addition of more than 100,000 MWwould be required.
The Government of India has recently announced Jawaharlal Nehru National Solar Mission(JNNSM) for promoting solar power projects in various parts of the country. The objectiveof the JNNSM under the brand "Solar India" is to establish India as a globalleader in solar energy by creating the policy conditions for its diffusion across thecountry as quickly as possible. The Mission has set a target of 20,000 MW and stipulatesimplementation and achievement of the target in 3 phases (first phase upto 2012-13, secondphase from 2013-17 and third phase from 2017-22) for various components including utilitygrid connected solar power. Under this, it is proposed to harness the solar energyabundantly available in India and use the same for power generation to meet the evergrowing demand for electricity across the country.
The above opens very good opportunity for diversification into solar power generationwherein the raw material is the solar radiation and there is one single customer - theGovernment through its specified agency viz., NTPC Vidyut Vyapar Nigam Ltd (NVVN) whowould be buying the entire production at a price which permits 16% ROI through a PowerPurchase Agreement (PPA) for 25 years.
Therefore it is decided to diversify into power generation and solar power to beginwith. This would be followed up with a foray into the infrastructure arena. To enable yourcompany to do the same, the Main Objects and Other Objects of the Memorandum ofAssociation of your Company have been changed along with the change of name to Shri MatrePower & Infrastructure Ltd after duly obtaining the shareholders approval through thepostal ballot process and securing the requisite statutory approvals.
Shri Matre Power & Infrastructure Limited (SMPIL) is participating in the tenderbid process floated by the above nodel agency NVVN. SMPIL has already acquired 146 acresof land in Ramdevara Village near Pokhran, Jodhpur District, Rajasthan where the solarradiation levels are amongst the highest in the country. Further requisite water for asolar thermal project is also available on the land. Your Company is in the process oftying up for advanced technology with leading international technology providers. YourDirectors are optimistic that your Company would succeed in the above bid process andimplement and operate the solar power project profitably.
RISKS & CONCERNS :
The Management of the company analyses and evaluates on a continuous basis the variousrisks associated with the business and adopts Risk Management Practices to minimize theadverse impact of these risks. Both external as well as internal developments are assessedregularly.
The Management constantly scans the environment covering areas like market scenario,Government policies, national as well as global developments, technological changes etc.Business risks and uncertainties are identified and prioritized. Appropriate strategiesare planned and implemented.
INTERNAL CONTROL SYSTEMS :
The company has an effective Internal Control System with respect to purchase and saleof inventory, fixed assets and goods. It has an internal audit department wherein audit ofthe transactions of the plants and the corporate offices are done at periodical intervalsin order to ensure that recording and reporting are adequate and proper. The internalaudit also verifies whether internal controls and checks and balances in the system areadequate, proper and upto date corrective actions for any weaknesses in the systemthat are disclosed by the audit are taken.
The Audit Committee consists of eminent Independent Directors. It reviews the importantobservations of the Internal Audit and suggests corrective action for the management toimplement. It also meets periodically to review and recommend quarterly, half - yearly andannual financial statements of the company. The Committee also holds discussions with theInternal Auditors, Statutory Auditors and the Management on the matters relating tointernal controls, auditing and financial reporting. The Committee also reviews with thestatutory auditors, the scope and results of the audits.
FINANCIAL PERFORMANCE VS. OPERATIONS PERFORMANCE :
During the year the Company has earned cash profit of Rs. 39,440 thousands(previous year earned cash profit of Rs. 50,963 thousands). After providingdepreciation of Rs. 30,093 thousands (previous year Rs. 30,122 thousands) the net profitfor the year stood at Rs. 9347 thousands (previous year profit Rs. 20,841 thousands).
HUMAN RESOURCES & INDUSTRIAL RELATIONS :
The company continues to maintain cordial industrial relations. Retention of theworkforce is a key challenge considering the exponential growth in the industrial sector.The company has been consistently working on learning development of employees to enablethem to take on larger responsibilities.
The company had on its rolls 14 permanent employees at the end of financial year2010-11.
CAUTIONARY STATEMENT :
Statement in this Management Discussion & Analysis describing the company’sobjectives, projected estimates and expectations may constitute forward looking statementwithin the meaning of applicable laws and regulations. Actual results might differmarginally or materially from those either expressed or implied.