Gujarat Gas Ltd Management Discussions.

The Management Discussion & Analysis is as under:

1. INDUSTRY STRUCTURE AND DEVELOPMENTS

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 worlds 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.

World energy demand has been increasing steadily with Natural Gas accounting nearly half of increased consumption. Gas demand growth was especially strong in China and the United States, where cheap gas continues to replace coal for electricity generation. Indias energy demand outpaced global demand growth in 2018 according to the International Energy Agency.

Crude Oil prices have always been at the forefront for all energy prices including Natural Gas. The crude oil prices has seen some hardening over the past 2 years mainly influenced by economical and geo-political factors

The oil prices in FY 2018 has seen major volatility with oil prices reaching nearly $86 /bbl in October 2018 mainly on account of sanctions imposed by United States of America on Iran. However, prices fell sharply in November after the United States announced temporary waivers to the sanctions on Iran for eight countries, including China and India. The decline in prices also reflected continued rapid growth in oil production in the United States, as well as a substantial increase in supply by the Organization of the Petroleum Exporting Countries (OPEC) and the Russian Federation.

With the completion of temporary waiver, the crude oil prices are expected to rise in the short term till alternate supply is made available. India being one of the customers for Iranian oil supply; this shall have a negative impact and may lead to increase in Indias crude oil basket.

Growth of Indias share in the global energy market is expected to increase in the coming years. India has been mainly dependant of high polluting fuels viz. coal, Furnace Oil to meet its ever growing energy needs. Government of India; realising the importance of protecting the environment has announced; one of its important initiatives for a more sustainable future; an aggressive target to increase the share of Natural Gas in the overall energy consumption mix to 15 percent from the current levels of 6 percent.

Historically the Natural Gas usage in India has seen a slowdown with power sector shifting back to coal from Natural Gas due to lower availability of cheap domestic gas and increased dependency on costly R-LNG.

The City Gas Distribution ("CGD") business in India is expected to take centre stage as a priority sector, with several programs and initiatives being announced to bolster city gas demand. The expected growth in consumption under this category is around 10 percent between FY 2018 and FY 2030. The sector regulator Petroleum and Natural Gas Regulatory Board during the year launched 9th CGD Bidding Round on 12th April, 2018 for 86 Geographical Areas (GAs) covering 174 districts (156 complete and 18 part) in 22 states/ union territories, 24% of Indias geographical area and 29% of its population. Further, PNGRB also launched the 10th CGD Bidding Round on 8th November, 2018 for 50 Geographical Areas (GAs) covering 124 districts (112 complete and 12 part) in 14 states, 18% of Indias geographical area and 24% of its population.

2. OPPORTUNITIES AND THREATS

The Government is promoting the usages of clean and green fuel, i.e. Piped Natural Gas ("PNG") and Compressed Natural Gas ("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.

For expansion of CGD networks; PNGRB has come up with the 9th and 10th CGD Bid Round in which your company has won 7 new Geographical Areas and shall be now be able to expand its network in the state of Rajasthan, Punjab, Haryana and Madhya Pradesh.

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 25 CGD licenses spread across 41 districts and six states and one Union territory which accounts to c. 11% of total CGD licenses and c. 10% total Authorized areas issued by PNGRB in India and 1 transportation pipeline license. Your Company has an expanse of around 1,69,500 square kilometres of licensed area under its umbrella and continues to hold the leadership position of being the largest CGD Company in terms of market share with catering to more than 13.5 lakh residential consumers, over 12,300 commercial customers, dispensing CNG from 344 CNG stations for vehicular consumers and providing clean energy solutions to over 3,500 industrial units through its wide spread operations with around 23,200 kilometres of Natural Gas pipeline network.

Despite the dynamic business environment and intensely competitive energy market; Your Company has been resilient to connect around 300 new industrial units during the year. Your company has recorded a robust growth of around 3% in Industry 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 1,00,000 residential customers and erected / commissioned 63 new CNG stations during the year. Your Company has been able to sustain the volumes with growth of around 6% 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 2018 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 end of 2018 seems to have bottomed out as 2019 sets in. Indias economic outlook is expected to remain promising and would strengthen further in FY19-20.

Indias 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 user across its licensed expanse of around 1,69,500 square kilometres through its ever growing pipeline network spread across 41 districts and six states and one UT. 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 PNG and 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 Companys 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 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 & transparency. Your Company also continues to invest in Information Technology to support various business processes.

FINANCIAL AND OPERATIONAL PERFORMANCE

The stand-alone net profit after tax (Total comprehensive income) for the current financial year 2018-19 increased to Rs 414.97 Crores from Rs 251.24 Crores in the previous year. The Company had healthy net cash inflows from operations of Rs 956.13 Crores during the financial year 2018-19.

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.

Details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in key financial ratios, along with detailed explanations therefore, including :

Particulars FY 2018-2019 FY 2017-2018 Remarks
Debtors Turnover 17.65 17.15 Revenue From Operation / Average Trade Receivable
Inventory turnover Not relevant from company prospective
Interest Coverage Ratio 4.82 4.13 (EBITDA-current tax)/ Interest Cost
Current Ratio 1.22 0.90 Current assets / Current liabilities net of customer deposit
Debt Equity 1.01 1.26 Total Borrowing / Total Equity
Operating Profit Margin (%) 12.40% 14.14% Operating income / Revenue from operations
Net Profit Margin (%) 5.24% 4.60% PAT / Revenue from operations
Return on Net Worth 20% 16% PAT / Average net worth

Current ratio of company has significantly change from 0.90 to 1.22 in FY 18-19 on account of increase in Bank and other balances.

HUMAN RELATIONS AND PARTICULARS OF EMPLOYEES

Your Company employed 1084 employees as on 31st March 2019. 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.

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.

ANNUAL RETURN

The Annual Return of the Company in the Form MGT-7 is available on the website of the Company at https://www.gujaratgas.com/GGL/annual-return.pdf.

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 - 5.

Foreign Exchange Earnings and Outgo -

The Company has incurred expenditure in Foreign Exchange to the extent of Rs. 1.48 Crores during FY 2018-19 (Previous year FY 2017-18 Rs. 0.60 Crores) and the Foreign Exchange Earnings during FY 2018-19 were Rs. NIL (Previous year FY 2017-18 Rs. 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, 2019, 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, 2019 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.

For and on behalf of the Board of Directors
Date : 29th May, 2019 Dr. J. N. Singh, IAS
Place : Gandhinagar Chairman