Gujarat Gas: Leading City Gas Distribution Player

Gujarat Gas Limited (GGL) incorporated in 1980 and is in the Business of Procurement and Distribution of Natural Gas.

(A) About Gujarat Gas Ltd

  • The BG Group,  British multinational oil and gas company, acquired a majority stake in the company in 1997.
  • In October 2012, BG Group sold its 65% Stakes to GSPC Gas, a unit of the state-run Gujarat State Petroleum Corporation (GSPC).
  • In 2015 GSPC Gas Company, GGCL, Gujarat Gas Financial Services and Gujarat Gas Trading Company merged with GSPC Distribution Networks (GDNL) and the new company was named Gujarat Gas Limited.
  • Presently, Gujarat State Petronet Limited is the holding company of Gujarat Gas Limited holding 54.17% shares in the company.
  • Company also has one Associate Guj Info Petrol Limited, holding 49.94% shares in the company.

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Overview of operations of Gujarat Gas Ltd

stock research Gujarat Gas with details of history and major events

How Gas Distribution Companies Work

  • There is bidding for cities conducted by Petroleum and Natural Gas Regulatory Board (PNGRB). Companies that win the Bid get to set up their Network.
  • Moreover, CGD Companies get exclusivity benefits in the form of Marketing Exclusivity which is for a period of 8-10 years depending upon the Contract Terms & Infrastructure exclusivity for a period of 25 years.
  • In the Marketing Exclusivity, no other Player can Market Natural Gas within that particular area. But after the expiry of such exclusivity, a New Player can Market Natural Gas but shall need to pay some fees to the Original CGD Player in order to use its Pipeline.
  • On the other hand, in Infrastructure exclusivity CGD Player gets right to lay, build and operate pipeline in its Geographical Area and no other company is allowed to lay the pipeline.

(B) Executive Board Members

(i) Shri Anil Mukim (Former Chairman)

Shri Anil Mukim, IAS is the Chief Secretary of Gujarat State. He is the current Chairman of the Company. He has done Graduation in Commerce and Law and joined IAS in 1985. Mr. Mukim also held many important portfolios including Collector & District Magistrate, Vadodara, Bhavnagar & Kutch-Bhuj; Additional Principal Secretary to Honourable Chief Minister, Municipal Commissioner, Ahmedabad; Principal Secretary, Revenue Department; Additional Chief Secretary, Health & Family Welfare Department; Additional Chief Secretary, General Administration Department and Additional Chief Secretary, Finance Department with Government of Gujarat.

He has also held several positions at Government of India, including Joint Secretary, Ministry of Commerce & Industry; CVO, Housing & Urban Development Corporation and Secretary, Ministry of Mines. Moreover, he has wide corporate experience and held Directorship on the Board of various distinguished Companies.

In addition to his responsibility as Chief Secretary of the State, he is also Chairman of Gujarat State Petroleum Corporation Limited, Gujarat Alkalies & Chemicals Limited, Gujarat Narmada Valley Fertilisers & Chemicals Limited and Gujarat Maritime Board.

Mr. Mukim has ceased to be Director and Chairman of Gujarat Gas Limited w.e.f. 3d September, 2021, on account of his superannuation as Chief Secretary to Government of Gujarat

(ii) Mr. Pankaj Kumar (Current Chairman)

Pankaj Kumar, IAS is the Chief Secretary of Gujarat State. Shri Pankaj Kumar is a Senior IAS Officer of 1986 batch. He has done his B. Tech (Civil Engineering) from IIT, Kanpur and also MBA (Public Policy & Management) from ICPE, Ljubljana.

He has also wide experience in various departments such as Revenue, Home, Health and Family Welfare, Agriculture and Disaster & Relief Management in various capacities. He has also served in state PSUs like Gujarat Maritime Board (GMB), Gujarat State Road Transport Corporation, Gujarat Mineral Development Corporation etc. Mr. Pankaj also worked as Collector and DDO in several districts as well. He also served as Additional Principal Secretary to Honorable Chief Minister, Gujarat. He worked as Additional Chief Secretary, Home Department, Government of Gujarat before his appointment as Chief Secretary.

Mr. Kumar led series of reforms in Revenue Department including development of online portal iORA that facilitated online Non-Agricultural (NA) permission and Land Premium Payment notably. He has also been assigned the task to guide and supervise Health & Family Welfare Department for entire work relating to Covid-19 activities for the State of Gujarat.

In addition to his responsibility as Chief Secretary of the State, he is also Chairman of Gujarat State Petroleum Corporation Limited, Gujarat Alkalies & Chemicals Limited, Gujarat State Fertiliser & Chemicals Ltd., Gujarat Narmada Valley Fertilisers & Chemicals Ltd., Gujarat Maritime Board, Gujarat Gas Limited and Chairman & Managing Director of Gujarat State Petronet Limited.

Mr. Pankaj is appointed as Chairman of Gujarat Gas Limited after Mr. Anil Mukim, who ceased to be Director and Chairman of Gujarat Gas Limited w.e.f. 3rd September, 2021, on account of his superannuation as Chief Secretary to Government of Gujarat.

(iii) Sanjeev Kumar (Managing Director)

Mr. Sanjeev Kumar, IAS is Managing Director of Gujarat State Petroleum Corporation Limited. He has done B. Tech (Hons.) from I.I.T. Kharagpur and also Masters in Public Affairs from Humphrey School of Public Affairs, University of Minnesota, USA. Moreover, he has very rich knowledge and wide experience of working in various Government Departments and Public Sector Undertaking. Mr. Sanjeev has also held distinguished positions in Government of Gujarat including Collector of Kheda & Gandhinagar.

Moreover, he has vast experience in Finance Department wherein he has served as Additional Secretary (Budget), Secretary (Expenditure) and Secretary (Economic Affairs) in Government of Gujarat. He was also the Managing Director of Gujarat State Investment Limited.

He has also served as Director on the Board of various Companies including Gujarat State Financial Services Ltd, Gujarat Industrial Development Corporation, Gujarat State Electricity Corporation, Gujarat Mineral Development Corporation, Gujarat Urban Development Company Limited, Gujarat State Transport Corporation Ltd, Gujarat Infrastructure Development Board, Diamond Research and Mercantile City Ltd, Urban Ring Development Corporation Ltd, Dholera Industrial City Development Ltd.

(C) Shareholding Pattern

(D) Revenue Segmentation

Gujarat Gas Limited is the largest City Gas Distribution Company. The business of natural gas involves distribution of gas from sources of supply to centers of demand and also to end customers. The Company provides the following Products to its Consumers –

(i) Piped Natural Gas (PNG)

PNG (Piped Natural Gas) is the natural gas supplied through mild steel (MS) and polyethylene (PE) pipelines to cater to the natural gas demand of customers in various segments, i.e. Domestic / Commercial & Non – Commercial / Industrial segments.

(ii) Compressed Natural Gas (CNG)

Compressed Natural Gas, also well known as CNG, is an Auto Fuel in Gaseous state. Mainly comprising of Methane (80% to 90%). CNG is low density and is compressed up to 200 bar pressure. This is so that it can be stored in a larger capacity in the fuel tank. Hence, it is named Compressed Natural Gas.

(E) Operational Parameters

(i) Volume of Natural Gas Delivered – PNG and CNG

  • Company’s PNG Industrial and Commercial Volume have shown a good growth and also increased from 4 mmscmd 2016 to 7.2 mmscmd in F.Y. 2021.
  • On the other hand, Volume of PNG – Household Segment has shown a stable growth over last few years.
  • Volume of CNG grew up to 1.3 mmscmd in 2021 from 1.1 mmscmd in 2016.
stock research of Gujarat Gas ltd with details of year on year volume growth

In the year 2020, Increase in the Volume of Industrial and Commercial Segment is mainly on account of Ban on usage of Coal Gasifier in the Morbi industrial cluster, Ceramic Hub of India resulting in switchover to natural gas. This ban acted as a huge credit positive for the sole PNG supplier operating at Morbi – Gujarat Gas Limited.

On the other hand, in the year 2021 Total Volume of the Company remains almost at the same levels as was in the previous year (9.5 mmscmd) i.e. 9.3 mmscmd.

*mmscmd – Million Metric Standard Cubic Meter Per Day

(ii) EBITDA per unit till FY20

Gujarat Gas Ltd EBITDA/scm has shown a continuous growth over the years. Moreover, Company’s EBITDA/scm increased from 3.6 in 2016 to 4.7 in the year 2020.

stock research Gujarat Gas with detail of margin per unit

*scm – Standard Cubic Meter

(F) Cost Structure

As on 30.June.2021, Gujarat Gas Limited’s Cost Structure is as follows –

stock research of Gujarat Gas with detail of cost structure of FY21

(G) Network Spread

Company has a strong Distribution Network with 27 CGD licenses across 43 districts in 6 states of Maharashtra, Gujarat, Rajasthan, Punjab, Haryana and Madhya Pradesh and also One Union Territory of Dadra & Nagar Haveli.

(i) Licensed Area

Company has been continuously growing and expanding its horizon by venturing into new geographic areas. Moreover, GGL’s Licensed Area has increased from 96000 Square Kilometer in 2017 to 175600 sq. km in the year 2021.

license of distribution of Gujarat Gas Ltd  with detailed analysis of stock

(ii) CNG Stations

Company’s CNG Stations has increased to 539 in 2021 from 234 in 2015.

stock research Gujarat Gas Ltd with detail of growth of CNG stations operated

(iii) Residential Customers and Commercial Customers – PNG customers

Company has increased its Residential as well as Commercial Customers customer Base over the years. Company’s Residential Customer Base has increased from 1,099,122 in 2016 to 1,546,000 in 2021.

On the other hand, Company’s Commercial Customer Base has increased from 12,077 in 2016 to 12,900 in 2021.

stock research of Gujarat Gas Ltd with detail of year on year growth of residential and commercial customers

(iv) Industrial Units – PNG supply

Industrial Units to which Company supply PNG has also increased over the years, i.e. from 2750 in 2015 to 4000 in 2021.

stock research of Gujarat Gas Ltd with detail of year on year growth of Industrial units

(v) Pipeline Network – for Industrial units

GGL’s Pipeline Network Provided to Industrial Units has also increased due to increase in the Industrial Units to Which PNG is provided by the Company. Company’s Pipeline Network increased to 30,000 Km in 2021 from 15,000 Km in 2015.

stock research of Gujarat Gas Ltd with detail of growth of its pipeline network

(G) Market Share

With the a coverage of 1,75,600 square kms of Licensed Area, GGL has a Dominant Position in the Market.

Year-on-Year Market Share Of Gujarat Gas Limited –

year on year market share of Gujarat Gas Ltd with complete stock research

(H) Financial Parameters

stock research of Gujarat Gas Ltd with 8 years of financial performance detail

Year-on-Year Provision For Tax as % of Profit Before Tax

stock research of Gujarat Gas Ltd with detail of tax expense in last 8 years
  • GGL’s Net Sales has shown a volatile growth over the years. It grew at a CAGR of 4% in last 7 years. In F.Y. 2020 Company’s Net Sales increased to INR 100300.34 Crore from 7754.41 Crore in 2019 . This is on account of supply of Natural Gas to Morbi industrial cluster, Ceramic Hub of India, due to Ban on usage of Coal Gasifier in that area.
  • GGL’s PAT has shown a good and continuous growth over the years. Over last 7 years, Company’s PAT has grew at a CAGR of 72% over last 7 years. Robust increase in the GGL’s PAT in F.Y. 2020 is due to Re-measurement of deferred tax liabilities pursuant to taxation ordinance dated 20th Sept. 2019 and company opting for concessional tax rates.
  • Company’s PBIDT Margin has shown a stable growth over the years.
  • Also, Company’s ROCE and ROE have shown a constant increase over the years.

(i) Improvement In Operating Performance

The Company has been able to sustain improvement in its operating performance, despite volatility in RLNG and Domestic Gas Prices. Operating performance improved in fiscal 2020, contributed by rise in the gas volumes sold and improved margin levels.

Moreover, Average gas volumes sold grew by 44% to 9.44 mmscmd in fiscal 2020 from 6.54 mmscmd in fiscal 2019. The significant growth in Volumes was mainly contributed by rise in sales in the Morbi industrial Area, wherein the National Green Tribunal’s (NGT) banned the usage of Coal Gasifiers.

(ii) Improvement In Margins

Improvement in Operating Margins to 18.85% in 2021 from 13% in the fiscal 2019 and 16.44% in 2020. This is mainly because of decline in the spot LNG prices. Also, the sourcing mix has tilted towards the cheaper spot LNG to meet the incremental demand of industrial customers.

CAPEX

Company did an average annual capex of about INR 6 Billion-7 Billion from Fiscal year 2015 to 2021.

Capex of Gujarat Gas Ltd with complete stock research

(I) New Geographical Areas

  • GGL has won the rights to develop 6 new geographical areas under the 10th round of CGD bidding conducted by PNGRB. The new GAs include Sirsa, Fatehabad, and Mansa districts (Haryana and Punjab), Ujjain and Dewas districts (except areas already authorized in Madhya Pradesh). Also, Jhabua, Banswara, Ratlam and Dungarpur districts (Madhya Pradesh and Rajasthan), Ferozepur, Faridkot and Sri Muktsar Sahib districts (Punjab), Hoshiarpur and Gurdaspur districts (Punjab) and Jalore and Sirohi districts (Rajasthan).
  • GGAS has also won one geographical area of Narmada (Rajpipla) district in Gujarat in the 9th CGD bidding round.

Outlook of Management for volume growth

Further, Company’s management has guided for volume potential of 3 mmscmd-3.5 mmscmd from seven new GAs over the next 3-5 years. Moreover, the company expects 50:50 share of CNG/domestic PNG and industrial PNG in the overall volume from seven new GAs as Gurdaspur, Faridkot and Ratlam are industrial districts in Punjab and Rajasthan. Hence, new GAs have the potential to increase GGAS’s volume by 37% from the current level of 10.5 mmscmd.

In June 2021, Company has acquired CGD business of Amritsar and Bhatinda Geographical Areas from Gujarat State Petronet Limited (‘GSPL’). This acquisition will result in more growth opportunities line with strategic directions of the Board of Directors of the Company.

(J) Overall Outlook for growth of Gujarat Gas Ltd

  • GGL has approved capex plans of Rs. 10 billion per year for each FY22 & FY23. The capex will be funded through internal accruals only.
  • Company is also continuously focused on growing and expanding its network by venturing into new geographic areas and to reach every possible Natural Gas user across its licensed area. Moreover, Company is expecting increase in Customer Base and Volumes on account of increase in its Geographical Area as well as in Licensed Area.
  • 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 endeavor 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.

(K) Opportunities and Strengths

(i) Leading Player in CGD Industry

GGL has a strong and established market position in the City Gas Distribution industry in India, indicated by its industry-leading presence in 42 Districts. Also, it has a dominant Market position particularly in Gujarat, the largest gas consuming state in the country, on account of its first mover advantage in major areas, continuous infrastructure development and high level of entry barriers. Further, the company has won 7 New GAs in 17 cities in Punjab, Haryana, Madhya Pradesh, and Rajasthan. Moreover, these New GAs will help the Company in sustaining the dominant Market Position in the CGD Industry.

(ii) Established Gas Sourcing Arrangements

The Company procures Administered Pricing Mechanism (APM) gas for domestic Piped Natural Gas (PNG) & Compressed Natural Gas (CNG) from GAIL (India) Limited and through market for its Industrial as well as Commercial requirements which is majorly sourced as Regasified Liquefied Natural Gas (RLNG).

The Ministry of Petroleum & Natural Gas Government of India, under its guidelines has accorded highest priority for gas allocation to PNG-Domestic & CNG customers from F.Y. 2015 onwards. Accordingly, GGL receives natural gas under Administered Pricing Mechanism (APM) for meeting its requirements for these segments.

(iii) Increasing Demand For Environmentally Cleaner Fuels

The government has been actively promoting a shift towards cleaner energy sources, i.e., natural gas. Moreover, with increasing environmental concerns over certain polluting fuels, City Gas Distribution projects have become a priority segment of natural gas business. The company is also expected to benefit from the continued increase in Natural Gas demand (CNG and PNG) in Gujarat, which is amongst the highest natural gas consuming state in India.

Further, there is increase in the number of CNG operated vehicles on account of the pricing economics of natural gas compared with other conventional fuels. The number of CNG vehicles is also expected to increase which could support higher CNG demand.

(iv) Strong Business Profile

Gujarat Gas Limited has a Strong Business Profile owing to the following factors –

  • The continued regulatory push towards cleaner fuels.
  • The established track record of expansion in Margins.
  • Improvement in volumes and operational efficiencies.
  • An increase in the Geographical Presence.
  • The increased share of Compressed Natural Gas (CNG) as well as Domestic Piped Natural Gas (PNG) customers.

(M) Risk/Concerns

(i) Presence Of Alternative Fuel In The Market

Company caters both Industrial and Commercial Customers. Demand From these Consumer Segments directly relates to the price as well as to the volume risks depending on the price of alternate fuel like furnace oil, as the industrial furnaces in some of the user segments are designed for switch between fuels within a short time period and without any major production disruption, to take advantage of lower price of competing fuel.

However, National Green Tribunal’s (NGT) order in March 2019 for banning the use of coal gasifiers in Morbi region of Gujarat led to migration of number of industrial customers from coal gasifiers to PNG. This resulted in substantial growth in the gas sales volume of the Company.

(ii) Regulatory Risks in the Gas Distribution Business

Regulation of Natural Gas, including City Gas Distribution, is still in the initial stage in India and hence there is considerable uncertainty regarding the regulatory norms for Natural Gas Allocation and Distribution. Though the uncertainty in regulation is expected to subside as the industry attains maturity, any unexpected change in regulations regarding allocation of Natural Gas and pricing of end-product can adversely impact CGD players like Gujarat Gas Limited.

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References:  Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry’s Publications.

Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. Thus, the report & references mentioned are only for the information of the readers about the industry stated.

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