Gujarat State Petronet Ltd Management Discussions.

on 31st March, 2021

A. INDUSTRY OVERVIEW

The year 2020 was a year full of challenges. Since the early part of 2020, countries across the globe have been trying hard to first contain the virus, by imposing restrictions, working on medical infrastructure, providing economic stimulus & then by vaccinating the population. The disruptions caused globally by Covid-19 pandemic have been unprecedented.

The growth in Indias real GDP during 2020-21 is estimated at -8% as compared to the growth rate of 4% in 2020-211 India, which had one of the strictest Covid-19 lockdowns in 2020, had to face some tough economic consequences. Though in order to mitigate the social and economic impacts of Covid-19 induced crisis, Govt. of India along with the Reserve Bank of India (RBI) provided liquidity and other regulatory support and fiscal measures.

The Covid-19 pandemic impacted & continues to impact energy demand. As per IEAs Global Energy Review 2021, Global energy demand in 2020 fell by 4%, the largest decline since World War II and the largest ever absolute decline.

As per data released by PPAC on natural gas, consumption of 60637 MMSCM for the period FY 2020 - 21 was lower by ~5% compared to previous year. Further, PPAC data states that the cumulative import of 32855 MMSCM for year till March, 2021 was lower by 3 % compared with the corresponding period of the previous year2.

However, IEAs India Energy Outlook 2021, inter alia, states that, natural gas demand (vis-a-vis other fuels) has been resilient (in 2020), as low prices have offset some of the forces driving down demand.

India is the worlds 3rd largest energy consuming country, thanks to rising incomes and improving standards of living. Since 2000, India has been responsible for more than 10% of the increase in global energy demand & on a per capita basis, energy demand in India has grown by more than 60%.

However, on a per capita basis, Indias energy use and emissions are less than half the world average, as are other key indicators such as vehicle ownership, steel and cement output.

Accordingly, there is huge potential for further growth in energy service demand in India due to an expanding economy and the forces of urbanisation and industrialization.3

As per IEAs Global Energy Review 2021, Global gas demand is expected to recover 3.2% in 2021, erasing the losses in 2020, and pushing demand 1.3% above 2019 levels. The Report also states that with Indias economy expected to bounce back strongly in 2021, energy demand is set to rebound by 7%, pushing demand 2% above 2019 levels.

As the Govt. pushes for increasing share of gas in the energy basket from existing 6%, there have been discussions around natural gas contributing in multiple uses in Indias energy system. The same was also discussed in a recently published draft LNG policy of Ministry of Petroleum & Natural Gas, Govt. of India in "Strategies to increase LNG usage as Transport Fuel and in Mining sector".

Reforms in the gas sector along with mega investments on LNG terminals, gas pipelines, CGD infrastructure will be instrumental in realizing Indias vision of increasing share of gas. Govt. of India announced 1000 LNG Fuel Stations (which is likely to add about 20-25 mmscmd of new gas demand by 2035) to be established across all major highways, industrial corridors & mining sectors in the next 3 years.

Significant volumes of domestic gas are set to enter the market during the 2 year period from December 2020 with sellers like RIL-BP, Vedanta, RIL and ONGC monetizing their assets located across various regions, including in CBM blocks. Initially, domestic gas supplies may not meet incremental demand and may be a substitute for some of the LNG volumes that importers procure. However, going forward, riding on the strong demand from major gas consuming sectors, especially CGD & Fertilizer, India is expected to witness significant growth in its LNG as well as domestic gas consumption.

In so far as Infrastructure development is concerned, your Company successfully commissioned 2700 kms of gas pipeline connectivity projects in industrial regions across Gujarat, including Dahej SEZ, Gundala & Anjar.

Several major cross country pipelines are under development, including those of your Companys subsidiary, GIGL. In spite of major difficulties faced owing to COVID - 19 related restrictions, including labour movement, GIGL is in the advanced stages of completion of its Mehsana-Bhatinda network.

Development of the GIGL network will give a huge boost to gas consumption, especially for many of the unserved markets on the Northern / North-western belt. Gradual development of CGD networks enroute GIGL trunk infrastructure will not only lead to growth in gas consumption but also help in curbing pollution as gas is known to be a more environment friendly fuel. Development of gas pipelines are typically known to positively impact industrialization in areas from where they traverse through and GIGL is poised to play a similar role in the regions of Rajasthan, Punjab & Haryana.

India witnessed a strong growth in CGD network development in the past year. As per PPAC data2, while CNG stations went up by 29% y-o-y, domestic connections recorded a high of ~76 lacs (y-o-y growth of 25%) as on 28.02.2021. In fact, even Industrial connections posted a healthy increase of 9% y-o-y.

Gujarat Gas Ltd., a subsidiary of your Company, and Sabarmati Gas Ltd., an Associate Company, have together covered significant acreage of Gujarat with CGD networks. GGL has Indias largest customer base in residential, commercial and industrial segments.

India has ambitious plans for city gas distribution (CGD) networks to cater to households, commercial establishments and factories within cities. There are currently 18 states with CGD networks, and successive bid rounds have awarded CGD licences with the aim of reaching 70% of all households by 2030. This is one of the major reasons why CGD sector is set to act as a prime driver for natural gas consumption in India.

B. REGULATORY FRAMEWORK

In its quest to increase the share of natural gas, many cross country pipelines are proposed to be developed to set up a national gas grid. Indias downstream regulator, PNGRB, is in charge of overseeing this expansion as well as of regulating tariffs for users of this infrastructure.

The past year saw many sweeping changes in the regulatory space surrounding natural gas pipeline infrastructure. While Regulations around setting up of Gas Exchange were put in place, the year also saw the Regulator introducing many new concepts, including Unified Tariff and Imbalance Management Services.

In the Union Budget 2021-22, Finance Minister Nirmala Sitharaman had announced the setting up of a transport system operator (TSO). This move is aimed at ensuring that pipeline facilities will be partly available in the open market so that anyone can book space in a pipeline.

Policies will play a critical role in determining the speed and scope of growth in natural gas. India has already made some progress in identifying regulatory concerns around infrastructure development and policy support required for developing the gas markets. PNGRBs regulatory changes including Unified Tariff, Gas Exchange and Access Code for CGD entities are steps in the right direction. However, a lot of concerns still need to be addressed.

Accordingly, now in order to ensure we meet our targets of increasing share of natural gas in the energy mix, the policy makers need to focus on major facilitators for gas market development, including stable and conducive policy environment.

C. OPPORTUNITIES AND CHALLENGES

Your Company continues to play its role as an energy service provider ensuring reliable and uninterrupted access to natural gas customers, including CGD companies to ensure 24x7 supply of domestic / commercial PNG. In spite of several cases of COVID - 19 infections in your Company, systems were in place to ensure that gas transmission activity was not affected.

The response of your Company to the pandemic shows the resilience of its business as well as the critical role played by your Company as an energy service provider.

The role of your Company in the gas transmission space in India, especially in the Western & North-western belt cannot be undermined. Connectivity with all the major supply sources in Gujarat and Rajasthan directly or through Subsidiary company network along with connectivity provided to over 35 GAs is testimony to the strong growth your Company is poised to achieve. Moreover, your Company is also set to achieve connectivity with upcoming LNG terminals thereby increasing the flexibility available to its customers with regards to gas sourcing.

COVID-19 continues to impact business activities and lockdowns and other precautionary measures implemented for restricting the spread may persist to pose challenges not only in terms of impacting demand but also for execution of projects of your Company, especially those related to capacity expansion / debottlenecking. However, your Company has been working closely with its vendors and contractors to ensure safe work environment along with following all requisite protocols.

D. OPERATIONS AND FUTURE OUTLOOK

Your Company owns and operates the largest gas transmission network in Gujarat totalling to approximately 2700 Kms (as on 31st March, 2021).

Your Company has made applications to PNGRB for approval to implement several pipeline projects in Gujarat, including to interconnect with interstate network of MBPL, to connect with LNG terminals and to extend the reach of its existing network.

Government of Gujarats plan to expand Automobile, global manufacturing hub at Dholera and ceramic cluster (Morbi) will support the volume growth trajectory of GSPL.

GSPL has started implementation of LNG by Truck & PE network as a virtual pipeline business model for delivery of gas to customers situated far away from the pipeline. It may also be noted that GSPL became a Co-developer for development of natural gas infrastructure in Kandla SEZ in March, 2021 to connect a major industrial cluster for supply of gas. Also, industries expected to be set up across the Delhi- Mumbai Industrial Corridor will further enhance volume growth. In line with strong volume growth trajectory of Gujarat Gas, gas transmission volume from CGD segment is envisaged to be strong and robust.

Most successful bidders of domestic gas from RIL KG D6 block are from Gujarat. There is a possibility that significant volumes of the gas from those sources will flow through your Companys Pipeline Network.

Owing to development of new sources / terminals and demand centres, your Company may witness healthy growth in the next 3-5 years time horizon.

Performance highlights of Subsidiary, Associate & Joint Venture Companies:

GSPL India Gasnet Limited (GIGL) & GSPL India Transco Limited (GITL):

GIGL is currently working on development of 938 kms of Mehsana - Bhatinda pipeline network and has achieved an overall progress of more than 95% in Phase II of MBPL Project.

However, COVID - 19 has impacted the pipeline construction activity since mid-March 2020. Further, due to on-going protests against farm bills in Punjab and Haryana project activities have been severely affected, impacting the overall project schedule. However, the Company is making all efforts to regain the time lost and the said sections are scheduled to be commissioned during the year 2021 - 22.

In GITL, initial section of 365 Kms Pipeline and associated facilities from Kunchanapalle Dispatch Terminal, Andhra Pradesh to Ramagundam Fertilizers & Chemicals Limiteds Plant at Ramagundam, Telangana is in operations since the year 2019 - 20.

Gujarat Gas Limited:

Gujarat Gas Limited is one of the largest City Gas Distribution Company with its presence spread across various Districts in the State of Gujarat, Punjab, Rajasthan, Haryana, Madhya Pradesh, Maharashtra and Union Territory of Dadra and Nagar Haveli distributing natural gas to various industrial, commercial and domestic residential customers & to transport segment customers through CNG filling stations.

Gujarat Gas Limited has been continuously growing and expanding its horizon by venturing into new geographical areas and is committed to reach every possible natural gas users across its licensed expanse of around 1,75,600 square kilometres through its ever growing pipeline network spread across 43 Districts.

Gujarat Gas Limited has aggressively rolled out the expansion plans to develop networks to tap the unexplored CGD potential in new geographies within its operational areas. The sector regulator approved the transfer of license from GSPL to GGL for the GA of Amritsar and Bhatinda. GGL now has total 27 CGD licenses and 1 pipeline license and operates in 43 districts encompassing six states and one Union territory which accounts to almost 12 % of total CGD licenses issued by PNGRB in India.

Gujarat Gas Limited is supplying natural gas to more than 15.46 Lakh residential, over 12,900 commercial and non-commercial segments and over 4,000 industrial customers as on 31st March, 2021.

Gujarat Gas Limited also supplies natural gas in the form of Compressed Natural Gas (CNG) through 539 CNG stations catering to the automotive sector in the operational areas.

In the GA of Amritsar and Bhatinda, natural gas is supplied to over 4,450 residential customers, 36 commercial customers and 3 industrial customers. In addition, dispensing of CNG is done from 20 CNG stations.

Your Company has a total shareholding of 54.17% in Gujarat Gas Limited as on 31st March, 2021.

During the year ending 31st March 2021, Gujarat Gas Limited contributed to approx 20% of total transmission revenues of your Company.

Sabarmati Gas Limited:

Sabarmati Gas Limited (SGL) is engaged in the business of development of City Gas Distribution in districts of Gandhinagar, Mehsana and erstwhile Sabarkantha (now comprising of Sabarkantha and Aravalli) and Patan. SGL was granted authorization under PNGRB bidding round 6 for expanding CGD network across Patan District since then SGL now has developed 16 CNG stations and connected 13275 No. of Domestic, Industrial and commercial customers. SGL has network of 451 Kms of steel pipeline and 5,652 Kms of MDPE pipeline and customer base of 2,21,737 domestic customers, 377 industrial customers and 931 commercial customers as well as 135 CNG stations as on 3Th March, 2021.

Your Company has a total shareholding of 27.47% in Sabarmati Gas Limited as on 3Th March, 2021.

During the year ending 31st March 2021, Sabarmati Gas Limited contributed to approx 2% of total transmission revenues of your Company.

E. PERFORMANCE PROFILE

The Company continues to expand its gas grid to reach new markets and connect to new customers and new supply sources.

The infrastructure developed by the Company enabled the flow of LNG and domestic gas from various sources, including gas from Rajasthan fields, to reach various regions of Gujarat.

The Company has managed with a lean manpower strength on account of its well thought out strategy of developing major pipeline projects on EPC (Engineering, Procurement and Construction) Model.

The Company transported 13349 MMSCM of natural gas during the year, a marginal drop of ~3.5% over last years volumes transportation of 13826 MMSCM. The drop is mainly on account of lower offtake volumes due to Covid-19 lockdowns.

Income from transportation of gas for the year was Rs 2053.11 Crore as compared to Rs 2323.75 Crore for previous year.

Profit Before Tax (PBT) for the year is Rs 1,238.20 Crore as compared to Rs 1,278.60 Crore in the previous year.

During the year, Company has repaid substantial portion of debt and 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 use of the renewable energy sources like wind power.

Considering the cost benefit which a Wind Power Project can offer, your Company ventured into and has successfully completed commissioning of the Wind Power Project of 52.5 MW at Maliya Miyana, Rajkot and Gorsar & Adodar, Porbandar in the State of Gujarat.

The Company has generated 7,45,56,479 units of power from the same which resulted in the revenue of approx Rs 26.24 Crores in the year.

F. KEY FINANCIAL RATIOS

1. Companys Return on networth for FY 2020-21 is 12% vis-avis 16% for FY 2019-20. The change is on account of drop in revenue.

2. The net profit margin is 43% in current year as compared to 46% for FY 2019-20.

3. Interest Coverage Ratio for the year was at 16.45 compared to 9.97 of previous Financial Year. The change is due to lower interest expenses in current financial year.

4. Debt Equity Ratio was at 0.14 as compared to 0.24 of previous Financial Year. Due to substantial repayment of the outstanding loan during current financial year, there is significant change in the Debt Equity Ratio.

5. Current Ratio as at 31st March, 2021 is 0.45 vis-a-vis 0.33 as at 31st March, 2020. The change is due to repayment of outstanding loan during the current financial year.

G. RISK MANAGEMENT AND INTERNAL CONTROL SYSTEMS

Risk Management:

Your Company is in the process of adopting a comprehensive Risk Management System which identifies and documents business risks as well as provides for appropriate controls to mitigate these risks to the best extent possible across all aspects of the Companys business.

The said Risk Management System is based on the principle by which risks are currently managed across the Company. All functional teams address risks relevant to the assets, projects or functions and also work towards identifying appropriate mitigation strategies. Moreover, the Company has always focused on developing a "risk culture" that encourages all employees to identify risks and associated opportunities and to respond to them with effective actions.

Based on the current economic scenario affecting the Oil & Gas sector and the prevalent regulatory regime, these are the major risks being faced by your Company:

1. Affordability and Availability of Natural Gas:

Current estimates and outlooks for natural gas availability are positive and the likelihood of over-supply is nil. Several upstream players have announced commercialization of their gas fields, including from CBM blocks.

However, for an emerging economy like India, affordability of natural gas vis-a-vis other fuels, especially in the wake of rising oil prices is definitely a concern. In fact, the biggest risk for gas is its affordability in key demand sectors, such as Industries and Power. It is believed that rebalancing of global oil prices could also reduce the attractiveness of LNG usage by these sectors.

Moreover, considerable investments by upstream players in further developing gas fields shall also need consistent support from the Centre in form of policy / tax incentives.

2. Regulatory Risk:

The Petroleum and Natural Gas Regulatory Board (PNGRB) constituted in 2007, regulates midstream and downstream activities in the petroleum and natural gas sector. It protects the interests of consumers and entities engaged in the specified activities and ensures uninterrupted and adequate supply of petroleum, petroleum products and natural gas in all parts of the country to promote competitive markets.

Your Company believes that it is important that all critical issues are addressed in a way that it does not lead to market distortion in favour of a dominant player. It is expected that improved regulatory scenario would ensure more investments in the sector.

3. Safety and Operational Risk:

The changing technologies and the natural ageing of existing facilities like Pipelines and stations pose a risk as aged Pipelines are prone to unplanned shutdowns, increased maintenance and operating costs. Deployment of new technologies in line with Pipeline Integrity Management Systems and ongoing maintenance processes are the key to enhance the reliability of operations and reduction in operating costs as well as for maximising the life of assets while improving the safety of operating conditions. Pipeline systems safety is also a major challenge and even minor operational issue and safety issues may cause major safety hazards, disrupt operations at large levels, pose danger to life, property and safety of people and penalties from statutory/regulatory bodies and reputation of the organization may also be at stake.

Internal Control Systems:

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 financials 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 significant improved controls & transparency. Your Company also continues to invest in Information Technology to support various business processes.

H. HUMAN RESOURCES

During the year, the Company did not experience any strikes or lockouts.

The increasing human capital aspirations and the competitive environment are a major challenge for the Company in terms of attracting and retaining the human talent. In order to remain competitive, it is imperative that Company has to hire and retain sufficient number of skilled talent so as to strengthen its technical and project management skills.

The Company employed 264 employees as on 3Th March, 2021. (Previous year: 252 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.

The Company has in place an attractive policy of performance linked incentive to encourage and reward employee performance.

Forward Looking Statements:

This Annual Report con-tains forward-looking statements, which may be identified by words like will, believes, plans, expects, intends, estimates or other words of similar meaning. All statements that address expectations or projections about the future, including but not limited to statements about the Company strategy for growth and market position are forward-looking statements. Forwardlooking statements are based on certain assumptions and expectations of future events. The Company cannot guarantee that the assumptions and expectations are accurate or will be realized. The Company actual results, performance or achievements could differ materially from those projected in any such forward looking statements. The Company assumes no responsibility to amend, modify or revise any forward looking statements, on the basis of any subsequent developments, information or event.