Gujarat Gas Company Ltd Merged Management Discussions

The Management Discussion & Analysis is as under:

1. INDUSTRY STRUCTURE AND DEVELOPMENTS

Natural Gas is naturally occurring mixture of hydrocarbons consisting primarily of Methane. It can exist either as a gas or in solution with crude oil, where producers can then separate the two in the production process. Natural Gas is the cleanest and most efficient of the fossil fuels. It is the only fossil fuel whose share of the primary energy mix is expected to grow, as it has the potential to play an important role in the world’s transition to a cleaner, more affordable and secure energy future due to its high energy content, which results in lower emissions of carbon and volatile organic compounds (VOCs) at combustion, relative to coal and oil. These characteristics of gas provide substantial environmental benefits such as improved air quality, and reduced CO2 emissions. Natural Gas consumption had been declining in India from 2010-11 till 2014-15 due to reduction in domestic gas production coupled with availability of RLNG at higher prices compared to domestic rates. However, thereafter the volume has again started peaking up as shown in the chart albeit with increasing dependence on imported

RLNG. City Gas Distribution (CGD) sector is prominent in driving the growth of natural gas usage in India.

As always the case with the energy sector, crude oil has been at the forefront of creating dynamic global energy market. All other energy commodities including natural gas are directly or indirectly linked to global crude market and prices. For the last few years the story is revolving around the global crude oil price fall that started back in year 2014. The prices bottomed out in January of 2016, falling to the lowest level in over a decade. Uncertainty over the health of the global economy as well as the feared economic slowdown in China that began in mid-2015, led to a decline in global demand and consumption of oil. Oil producers continued output desperately trying to gain precious market share from others in the sector, even as prices continued to fall. An agreement to freeze production between major oil producers, spearheaded by Saudi Arabia and Russia, finally came to fruition in late November of 2016, which caused oil prices to rally at the end of 2016 into 2017-2018.

The macroeconomic parameters in India have generally shown improvement with lower volatility. India has also improved its global competitiveness position and ease of doing business rank due to reform focus of the government. As per a report of the United Nations titled "World Economic Situation and Prospects 2018", the outlook for India remains largely positive, underpinned by robust private consumption and public investment as well as on-going structural reforms. GDP growth is projected to accelerate from 6.6% in 2017-18 to 7.4% in 2018-191.

The CGD sector could sustain the growth, in spite of several hick-ups to economy and imbalanced oil and gas industry. The CGD business in India is still at its nascent stage. However, it has attracted policy makers and associated stakeholders towards tapping the immense growth potential due to commitment of Government of India towards climate change. The priorities of the Government, as outlined by Prime Minister are Energy Access, Energy Efficiency, Energy Sustainability and Energy Security. Towards achieving this, several initiatives have been taken for increasing production and exploitation of all domestic petroleum resources. Further, to have a gas based economy and enhance the share of gas in the energy basket, the Government has envisaged developing additional 15,000 km of gas pipeline network. At present, the natural gas grid in the country predominantly connects the western, northern and south-eastern gas markets with major gas sources. As a commitment to provide the clean energy in the Eastern part of the country, the Government has approved a capital grant of 5,176 Crore (40% of the estimated capital cost of Rs. 12,940 crore) under Pradhan Mantri Urja Ganga.

2. OPPORTUNITIES AND THREATS

The Government is promoting the usages of clean and green fuel, i.e. PNG and CNG by expanding the coverage of CGD network in the country. In order to promote the natural gas usage in the country, the Government has issued guidelines for making available domestic gas to the CGD entities for meeting the entire requirement of CNG for transport segments and PNG for Domestic. At present, 36 CGD companies are developing CGD networks in 91 Geographical Areas (GAs) in 21 State(s)/UTs, which are supplying clean cooking fuel in the form of PNG to about 42 lakhs households in the country. Further, Government has envisaged expanding the coverage of CGD networks across the country in synchronisation with the gas availability and pipeline connectivity. Few of the initiatives2 implemented by Government are as follows:

i. MoPNG has accorded priority to PNG (Domestic) and CNG (Transport) segments of CGD sector in domestic gas allocation.

ii. State Governments have been advised

a) To standardize the Road Restoration/ permission charges along with time bound permission for development of CGD networks.

b) To earmark land plot for development of CNG Stations in their Master Plan. c) Relevant modification in building bye-laws for providing gas pipeline infrastructure in residential & commercial buildings at architectural design stage. iii. CGD networks have been provided the status of “Public Utility” under the Industrial Dispute Act, 1947.

iv. Efforts are underway to develop an online portal in consultation with State Government to streamline the process of permissions to develop CGD network.

Government has envisaged to connect one crore households with PNG supplies for cooking purpose by 20202. It has also been envisaged to expand the coverage of CGD networks in additional 174 districts in coming years. For expansion of CGD networks, PNGRB has come up with the 9th CGD Bid Round with 86 geographical areas tendered for bid. This is largest ever CGD Bid Round covering 174 districts in 20 states and 2 union territories of the country. Your Company has evaluated new opportunities to expand network in contiguous areas and also evaluated opportunities to diversify its existing business into new markets organically and inorganically. Government of Gujarat has recently launched “PNG Sahay Yojna” to supplement Government of India’s “Ujjwala Yojna” and shall cover urban AAY (Antyodaya Anna Yojana) and BPL (below poverty line) category households. Under the scheme, piped natural gas shall be supplied to AAY and BPL households. Your Company is aiming to connect at least 35,000 household under the said government scheme. Similar to any other business, the Company faces challenges in the form of stiff competition from other conventional fossil fuels due to the abundance, accessibility and availability. The fuel also faces threat in the form of disparity in the tax structure compared to alternate fuels as PNG and CNG are still out of GST ambit. Notwithstanding these, your Company shall continue to focus placing environmentally clean natural gas to affordable markets for sustainable growth.

3. SALES AND MARKET PERFORMANCE

Your Company has total 18 CGD licenses spread across 22 districts which accounts to almost 20% of total CGD licenses issued by PNGRB in India and 1 pipeline license. Your Company has an expanse of around 96,000 square kilometres of licensed area under its umbrella and continues to hold the leadership position of being the largest City Gas Distribution Company in the Country catering to more than 12.5 lakh residential consumers, over 13,440 commercial customers, dispensing CNG from 291 CNG stations for vehicular consumers and providing clean energy solutions to over 3,300 industrial units through its wide spread operations with around 21,640 kilometres of natural gas pipeline network. Despite the dynamic business environment and intensely competitive energy market, your Company has been resilient to connect around 250 new industrial units and around 690 new commercial establishments during the year. Your Company has recorded a robust growth of around 17% in industrial volume compared to previous year. The volume in commercial segment has also grown by around 9% during the fiscal. Your Company has continued its focused efforts for developing and growing PNG (Domestic) and CNG business. GGL added more than 90,200 residential customers and erected / commissioned 46 new CNG stations during the year. Your Company has been able to sustain the volumes with growth of around 7% in the residential sector and around 10% in CNG (transport) sector. Your Company is aggressively planning for penetration in PNG (domestic), PNG (commercial) and CNG (transport) sector which is comparatively less volatile.

4. OUTLOOK

The year 2017 was marked by a number of key structural initiatives to build strength across macro-economic parameters for sustainable growth in the future. The growth in the first half of the year suffered despite global tailwinds. However, the weakness seen at the beginning of 2017 seems to have bottomed out as 2018 sets in. Currently, the economy seems to be on the path to recovery, with indicators of industrial production, stock market index, auto sales and exports having shown some uptick. India’s economic outlook is expected to remain promising and would strengthen further in FY18-19. India’s natural gas supply and demand outlook is changing. The Government of India (GoI) wants to make India, a gas-based economy by boosting domestic production and buying cheap LNG. India has set a target to raise the share of gas in its primary energy mix to 15% by 2022. To improve the share of natural gas and promote a gas-based and clean fuel economy, the GoI has adopted a systematic approach to focus on all aspects of the gas sector viz upstream, midstream and downstream including CGD network development. Your Company has been continuously growing and expanding its horizon by venturing into new geographic areas and is committed to reach every possible natural gas users across its licensed expanse of around 96,000 square kilometres through its ever growing pipeline network spread across 22 districts. Your Company shall continue to focus on growing the penetration in the current operating areas by increasing the PNG connections and additional CNG stations while tapping the untapped potential by expeditious rollout of distribution network in the newly acquired geographic areas as well. With this focused endeavour, GGL shall continue its efforts in providing clean fuel solutions across all operational area to augment an energetic top-line and bottom-line in coming years.

5. RISKS AND CONCERNS

The world runs on energy. Conventional fuels such as petrol and diesel have been in use for transportation for decades. But the current demand supply gap in energy, depletion of oil-based fuels and environmental constraints have created a necessity for alternate energy resources which are cleaner and environment friendly. Natural gas is being considered as the fuel for today, and is being looked as transportation as well as a domestic fuel. CGD is a growing business sector and it aims to provide uninterrupted supply of gas to domestic, commercial and industrial customers in the form of pipelined natural gas (PNG) and compressed natural gas (CNG). Natural Gas Distribution or CGD system is a pipeline system for transport of gas and their distribution among consumers. The distribution system includes gas distribution mains and service lines. The pressure is regulated in the system and is usually designed as closed ring or loop systems, in order to ensure uninterrupted gas supply. The sector has attracted many engineers, managers and practitioners. The CGD sector has seen a tremendous growth over the past few decades, but as the sector is still in the development stage, especially in India, many challenges are being faced by all the stakeholders of the CGD sector. Challenges and issues are now discussed in many forums and corrective actions are being taken. In CGD sector most of the issues are complex and the mechanism for combating the same are jointly worked out by the government and CGD entities.

CGD business like any other business is also exposed to inherent business risks due to internal and/ or external factors. To name a few, the risks could vary from continuous availability of economic gas supplies, pipeline connectivity for expansion in unconnected areas, abundant availability of economical alternate fuels, global economic downturn, crude market volatility, delay in permissions from various statutory bodies for laying the infrastructure, etc. . While some of these risks may be beyond the mitigation capability of any company or industry, as a prudent and responsible Company, all possible measures are being taken to safe guard the interest of the Company from being impacted due to the above listed risks and concerns. Your Company has adequate internal control procedure for assessing various business risks, which, the Company is likely to face in near to mid-term future and also prepares mitigation measures.

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 (CAG) and Statutory Audit by Statutory Auditors appointed by the

CAG. The Internal Control System is designed to ensure that all financial and other records are reliable for preparing 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 significantly improved controls and transparency. Your Company also continues to invest in Information Technology to support various business processes.

FINANCIAL AND OPERATIONAL PERFORMANCE

Your Company has been continuously growing and expanding its horizon by venturing into new geographic areas and is committed to reach every possible natural gas users across its licensed expanse of around 96,000 square kilometres through its ever growing pipeline network spread across 22 districts.

The stand-alone net profit after tax (Total Comprehensive Income) for the current year 2017-18 increased to Rs 251.24 Crores from Rs. 176.83 Crores in the previous year. The Company had healthy net cash flows from operations of Rs 782.92 crores during the year 2017-18. 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 and integrate SAP 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 1096 employees as on 31st March 2018. Your Company has a focus on building capabilities and developing competencies of its employees. The Company believes that training and 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 their skills/knowledge. Your 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.

DISCLOSURE UNDER THE SEXUAL HARASSMENT OF WOMEN AT WORKPLACE (PREVENTION, PROHIBITION AND REDRESSAL) ACT, 2013

Your Company has always believed that appropriate standard of conduct should be maintained by the employees in their conduct and that there should be a safe, non-discriminatory and harassment-free (including free of sexual harassment) work environment for every individual working in the Company. The Company has in place, the Policy on Prevention of Sexual Harassment at workplace, as a part of its Human Resource Policy. It aims at prevention of harassment of employees and lays down the guidelines for reporting and prevention of sexual harassment. During the year ended 31st March, 2018, no complaint has been received pertaining to sexual harassment.

COMPLIANCES OF APPLICABLE SECRETARIAL STANDARDS

The Company has complied with applicable Secretarial Standards during the year under review.

DIVIDEND DISTRIBUTION POLICY

The dividend payout is in accordance with the Companys Dividend Distribution Policy.

CORPORATE GOVERNANCE

The Company believes that good governance can deliver continuous good business performance. The particulars on Corporate Governance as required under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, is incorporated as a part of this Boards Report at Annexure - 1.

EXTRACT OF ANNUAL RETURN

The details forming part of the extract of the Annual Return in Form MGT - 9 is enclosed herewith as Annexure - 5.

CONSERVATION OF ENERGY, TECHNOLOGY ABSORPTION, FOREIGN EXCHANGE EARNINGS AND OUTGO

The details about conservation of energy, technology absorption, foreign exchange earnings and outgo is attached at Annexure - 6. The Company has incurred expenditure in Foreign Exchange to the extent of 0.60 Crores during FY 2017-18 (Previous year FY 2016-17 was 0.07 Crores) and the Foreign Exchange Earnings during FY 2017-18 was NIL (Previous year FY 2016-17 was Nil).

SIGNIFICANT AND MATERIAL ORDERS PASSED BY THE REGULATORS OR COURTS

There are no significant material orders passed by the Regulators / Courts during the year, which would impact the going concern status of the Company.

DIRECTORS RESPONSIBILITY STATEMENT

To the best of their knowledge and belief and according to the information and explanations obtained by them, your Directors make the following statements in terms of Section 134(3) (c) of the Companies Act, 2013:

a. that in the preparation of the annual accounts, financial statements for the year ended 31st March 2018, the applicable accounting standards have been followed and no material departures have been made from the same;

b. that accounting policies have been selected and applied consistently and judgment and estimates have been made that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company as at 31st March 2018 and of the profit of the Company for the year ended on that date;

c. that proper and sufficient care has been taken for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013, for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;

d. that the annual financial statements have been prepared on a going concern basis;

e. that proper internal financial controls were in place and that the financial controls were adequate and were operating effectively;

f. that systems to ensure compliance with the provisions of all applicable laws were in place and were adequate and operating effectively.

ACKNOWLEDGEMENTS

The Directors place on record their deep appreciation to employees of the Company at all levels for their hard work, dedication and commitment. The Directors are extremely grateful for all the support given by the Government of Gujarat at all levels. The Directors place on record their sincere thanks to the Promoters, Shareholders, Suppliers, Lenders and Customers for their valuable support, trust and confidence reposed in the Company.