Indraprastha Gas Ltd Management Discussions.

Company Overview

Indraprastha Gas Limited (Company) is a joint venture promoted by GAIL (India) Limited and Bharat Petroleum Corporation Limited (BPCL). Government of NCT of Delhi is also a stakeholder with 5% equity. The Company is in City Gas Distribution (CGD) business supplying natural gas to transport, domestic, commercial and industrial consumers. The operations of IGL is spread over NCT of Delhi, Noida,

Greater Noida, Ghaziabad, Gurugram, Meerut (except area already authorised), Shamli, Muzaffarnagar, Karnal and Rewari. The Company has received authorisation from PNGRB to set up CGD network in the geographical areas of Kanpur (except areas already authorized), Hamirpur & Fatehpur districts, Kaithal district and Ajmer, Pali & Rajsamand districts.

The Company has two associates which also operates as CGD Companies. Central UP Gas Limited (CUGL), caters to the cities of Kanpur, Bareilly, Unnao and Jhansi in Uttar Pradesh and Maharashtra Natural Gas Limited (MNGL), caters to the city of Pune and nearby areas of Pimpri, Chinchwad, Chakan, Talegaon and Hinjewadi in the State of Maharashtra.

With a modest beginning in the year 1998, the Company has become a leading CGD Company of the country today.

Indian Natural Gas Scenario

India is one of the largest natural gas consumer in the world and also one of the fastest growing energy consumer. However, share of natural gas constitutes around 6% in the country primary energy mix as against 24% in the world.

Government has been taking various steps to increase share of natural gas in primary energy mix to 15% in the coming years. In this regard, thrust has been given to increase domestic gas production, encourage import of Liquified Natural Gas (LNG) and augment LNG import capacity, completion of national gas grid, faster roll out of city gas distribution network across the country, etc.

The domestic natural gas net production showed a growth of 1.02% from 31,731 mmscm in FY2017-18 to 32,056 mmscm in FY2018-19. Total import of LNG during FY 2018-19 increased by 4.56% to 28692 mmscm from 27,439 mmscm in the previous year. The share of import of LNG has been showing an upward trend over the years and constitutes almost half of the total consumption of gas in the country.

The major sectors that contribute towards growth of natural gas are power, fertilizers, steel, petrochemical and CGD industry.

Natural gas industry in India is likely to grow faster in the coming years due to push given by government to make India, a gas based economy.

City Gas Distribution Sector in India

City Gas Distribution (CGD) is emerging as one of the fastest growing sector in India. Government of India has given thrust to this sector by pushing expansion of CGD network across the country. The financial year 2018-19 laid the strong foundation for future expansion of CGD sector. During this year, PNGRB invited bids in its 9th & 10th round for setting up CGD network in various parts of the country. In 10th round of bidding, PNGRB covered 50 geographical areas spread over in 14 states and 124 districts. It would increase coverage of CGD cumulatively to 70% of the countrys total population and 50% of countrys area.

The total investment for setting up CGD networks under 9th and 10th bidding rounds is expected to be more than Rs. 1,00,000 Crores in the next 8 years. These CGD bidding rounds will create employment generation potential for around 3 lacs person in skilled, semi-skilled and non-skilled category.

The government has also planned to connect 1 Crore households with PNG supply for cooking purpose by 2020.

In order to give boost to the CGD sector, the government has taken many steps such as:

i. Meeting the entire requirement of gas for transport and PNG domestic households of CGD companies in the country. ii. According the status of public utility to CGD sector. iii. Issuing guidelines for allowing the development of PNG network into defence establishment across the country. iv. Advising state governments to standardise the road restoration/permission charges and keeping provisions of land for CNG stations in their master plans.

The widespread coverage of CGD network across the country and government initiative to boost this sector would bring a number of opportunities for CGD companies in the country.

Your Company being a leading and premier CGD Company in the market is fully geared to leverage its execution capabilities and expertise for future growth.

Performance Analysis i. Financial Performance

IGL witnessed the following financial growth on standalone basis during the year under review:

• Gross turnover increased from Rs. 4993.78 Crores in 2017-18 to Rs. 6336.66 Crores in 2018-19.

Profit after tax (PAT) increased to Rs. 786.67 Crores in 2018-19 from Rs. 670.77 Crores in 2017-18.

• Earnings per share of the Company showed a growth rate of 17.33% from Rs. 9.58 in FY 2017-18 to Rs. 11.24 in FY 2018-19.

• Net worth of the Company as at 31st March 2019 was Rs. 4129.85 Crores as compared to Rs. 3512.9 Crores as at 31st March 2018.

• As on 31st March 2019, IGL is a zero debt Company.

ii. Ratio Analysis

S. Particulars For the Year 31 March 2019 For the Year 31 March 2018
1. Debtors Turnover Ratio 25.65 21.39
2. Inventory Turnover Ratio 992.31 847.78
3. Current Ratio 1.46 1.52
4. Operating Profit Margin % 18.36% 20.34%
5. Net Profit Margin % 13.71% 14.67%
6. Return on Net Worth % 19.05% 19.09%

iii. Segment Wise Performance

The Company has its presence in following segments:

• Compressed Natural Gas (CNG) - IGLs majority portion of the revenue accrues from sales of CNG amounting to Rs. 4761 Crores in FY 2018-19, accelerating at growth rate of 24% over previous year. The Company has 500 stations through which it provided gas to 10.7 lakh vehicles, with an average sale of 31.34 lakh kg per day in 2018-19.

• Piped Natural Gas (PNG) - The total sales of PNG grew by 35% to Rs. 1576 Crores in FY2018-19 from Rs. 1165 Crores in FY 2017-18. Sales volume of PNG increased from 479 mmscm in previous year to 553 mmscm in FY 2018-19, registering a growth rate of 15.45%. IGL provided 2.10 lacs new PNG connections during FY 2018-19. As on March 31, 2019, total PNG connections were provided to 11.02 Lakh households and 4276 Commercial & Industrial consumers. The Companys pipeline infrastructure expanded from 11,673 kms in FY 2017-18 to 13,028 kms in FY 2018-19.

Segment-Wise Sales Volume

The growth momentum of sales is likely to continue in the coming years.

Expansion in new geographical areas: The Company has spread its wings in number of new geographical areas after 9th and 10th round of bidding. The Company would continue to look for expansion in new geographical areas in the coming years. Green corridors: Opening of CNG/LNG stations along highways would provide opportunities to the Company to increase its CNG sales volumes.

Merger/acquisition of stake in other CGD Companies: The

Company is also exploring the possibility of expanding its operations through merger or acquisition of shares in other CGD Companies in the country.

Cost competitiveness: CNG is economical as compared to other liquid fossil fuels such as petrol/diesel. This would continue to push the conversion of vehicles to CNG mode.

Thrust on PNG by Government: Government has envisaged to provide 1 Crore connections by 2020 and has set aggressive targets for providing PNG connections. In line of the same, your Company has also set high targets for PNG domestic connections.

Smart Cities: The government of India is in the process of developing smart cities. These cities will have a strong infrastructure of clean and efficient fuel which would add to the growth prospects of the Company. Concern for pollution: There is a concern for increased population in the country. In order to curb the same, judiciary, central and state governments are giving boost to eco-friendly fuel i.e. CNG and PNG.

Threats, Risk & Concerns and Mitigations

Growing importance to electric vehicles: The popularity of Electric enabled vehicles have been growing in India with government introducing various incentive schemes. In medium to long term, these cars may pose a potential threat to CNG run vehicles.

The Company is preparing itself for meeting the challenge by becoming a part of value chain in electric car business. It has entered into a MoU with a reputed Company for putting up charging facilities at its stations. Regulatory Regime: The City Gas Distribution is under regulatory regime wherein the Regulatory Board (PNGRB) has framed various regulations, which have ramifications on day to day business operations of the CGD entity. The changes in the regulations, inter-alia, marketing exclusivity may have an adverse impact on the Company. With regard to

Marketing Exclusivity, IGL has challenged Regulations 5 and 6 of the PNGRB Exclusivity Regulations in the Honble High

Court of Delhi and the matter is sub-judice.

Your Company has already established the CGD infrastructure across all parts of NCT of Delhi. The setting up of new CGD infrastructure would be a major challenge for any new entrant in the prevailing scenario.

Non-availability of Natural Gas: Domestic Natural Gas is a scarce resource. The non-allocation of the required amount of low cost natural gas by government may have an adverse impact on margins.

However, considering the thrust of the government for promoting eco-friendly fuel and firm allocation of gas for transport and PNG domestic segments, it is expected that the Company would continue to get assured supply of gas at an affordable price.

Competition from Alternate Fuels: The Companys customers also have an alternative to move towards other fuels if there is a cost advantage. If such a scenario arises then it would impact Companys business.

CNG constitutes around 75% of the total sales volume of the Company and is very much competitive compared to alternate fuels i.e. petrol and diesel.

Macro-economic scenario: The changing macro-economic scenario can have an impact on the growth plan of the Company.

However, the Company has a strong financial position and credit rating which will help the Company to mitigate this risk. Healthy profitability, strong cash flow from operations, zero debt, and comfortable working capital position helps the Company to maintain its financial position.

Fire & Safety Risk- The Company is in gas distribution business and fire & safety is a major concern.

The Company gives utmost priority to this area and has robust system and procedures which helped it to record 161 million accident free man hours as on March 31, 2019.

Internal Control

The Company has adequate internal control procedures commensurate with the size and nature of its business. During the FY 2018-19, M/s PriceWaterhouse, Chartered Accountants and in-house audit team carried out internal audits and the internal audit reports prepared by them were placed before the Audit Committee.

Human Capital

The Company values its employees the most as their hard work and efforts lead to Companys growth. IGL provides training at all levels to its employees. As on March 31, 2019, IGLs employee strength stands at 644 employees. With the growth of the Company, the employee strength is anticipated to grow further. The Company undertakes various initiatives to integrate employees personal goals with Companys goals.

Environmental consciousness

Natural gas is an environment friendly fuel and emerging as a fuel for the future. There is an endeavour on part of the government to increase its share in the total energy basket of the country. The Company is making continuous efforts to promote its wider use among all categories of prospective customers. To ensure this, awareness is spread among all the users regarding the economical and environmental advantages of natural gas when compared to other fuels. The Company is promoting usage of natural gas as a fuel to reduce pollution in Delhi and its adjoining areas.

Cautionary statement

The Statement in this Management Discussion and Analysis Report describing the Companys objectives, projections, estimates, expectations or predictions may be ‘forward looking statements within the meaning of applicable laws and regulations. Actual results might differ substantially or materially from those expressed or implied. Important developments that could affect the Companys operations include demand-supply conditions, changes in government and international regulations, tax regimes, economic developments within and outside India and other factors such as litigation and labour relations.