In the past one year, the city gas distribution (CGD) segment has witnessed remarkable growth. The Petroleum and Natural Gas Regulatory Board (PNGRB) has taken several initiatives to provide a favourable business environment to CGD entities. Bidding criteria have been amended, new bidding rounds have been announced, pipeline connectivity is being improved, entry barriers for new players have been removed, the exit process for operators has been simplified, and penalties for under-performance have been introduced.
GGL’s current performance and future plans
In the first three quarters of 2018-19, the performance of Gujarat Gas Limited (GGL) was quite impressive. In the past, the company set up 20-22 compressed natural gas (CNG) stations in a year. However, in 2017-18, GGL set a record by establishing 46 CNG stations across the country. Subsequently, in the first three quarters of 2018-19, the company added 40 stations to its CGD network. Another 25 stations are expected to be established by March 31, 2019, setting a new record. During 2017-18, the company also laid substantial emphasis on digitalisation of its business processes in order to scale up its operations to cities in states other than Gujarat.
In 2019-20, GGL plans to set up 100 CNG stations across the country. It has identified several pilgrimage routes and business circuits in Gujarat which offer high potential for CNG projects. With regard to gas sales volumes, the company expects to record a 10 per cent year-on-year growth in its existing areas of operation. In 2017-18, the company’s average gas sales volume was 6.22 million metric standard cubic metres per day (mmscmd). This increased to 6.55 mmscmd in 2018-19 (till December 2018), which is below the targeted average of 7 mmscmd, on account of the subdued growth in Morbi and some other areas. However, in the past couple of months, the company’s average gas volume touched 6.8-6.9 mmscmd.
AGL’s current performance and future plans
The past few months have been quite eventful for Adani Gas Limited (AGL). On November 5, 2018, it was listed on the stock exchange. The company is the second largest CGD operator in the country in terms of market capitalisation, while it ranks fourth in terms of gas volumes. Currently, AGL has four operational areas – Ahmedabad, some portions of Vadodara, Faridabad and Khurja. It has also set up or is in the process of setting up CGD infrastructure in nine geographical areas (GAs) in collaboration with Indian Oil Corporation Limited (IOCL) under a joint venture (JV), Indian Oil Adani Gas Private Limited.
In Round IX of CGD bidding, the company secured 13 GAs individually, in addition to nine GAs which it won in a JV with IOCL. Of the 400 districts which have been awarded or are under bidding, AGL has roughly 50 districts. The average gas volume for the company is currently hovering at around 1.6 mmscmd, growing at a rate of 12-13 per cent per year. At present, AGL has 78 CNG stations and around 325,000 piped natural gas (PNG) connections.
Going forward, expanding its presence in new GAs will be a major challenge for the company. Besides, developing CGD infrastructure in new GAs, AGL is also planning to operationalise several GAs which it has secured in a JV with IOCL. In the newly secured GAs, it will add around 2.2 million PNG customers and roughly 460 CNG stations. With regard to the JV company, a commitment of adding 2.3 million PNG customers and 850 CNG stations over the next seven-eight years has been made. Given the huge work commitments, a lot of work needs to be done. To this end, the company has been rapidly hiring manpower.
At present, CNG accounts for 55 per cent of AGL’s total gas volumes while PNG accounts for the remaining 45 per cent. In the coming years, CNG is expected to gain dominance with its share increasing to 60-65 per cent.
Ninth and tenth CGD bidding rounds
From an operator’s perspective, the response of each entity to bidding rounds is driven by its own business and commercial objectives. The two recent mega bidding rounds (IX and X) point to the creation of a huge CGD ecosystem in the country. The central government has made its vision of taking a PNG connection to every house in the country quite clear. Given the huge size of GAs on offer under the recently concluded bidding rounds, it seems that the government is moving towards the creation of a regional gas distribution network.
In order to achieve the work commitments laid down in the minimum work programme, 3-7 CNG stations will have to be operationalised every day and roughly 7 km of pipelines will need to be added on a daily basis. Though these targets appear to be quite aggressive, synchronisation between government agencies and CGD operators will help in achieving them.
During 2018-19, GGL incurred a capital expenditure in the range of Rs 4 billion-Rs 5 billion. However, going forward, if gas volumes grow by 10 per cent, the capital expenditure is expected to grow by 15-20 per cent. For AGL, the capital expenditure has rem-ained in the range of Rs 2.5 billion-Rs 3 billion and is expected to remain the same in the future. In addition, a capex of around Rs 3 billion is being incurred by Indian Oil Adani Gas. In terms of Round IX commitments, the company will need to invest around Rs 150 billion over the next five years. It is hopeful of investing the requisite amount as it has been achieving financial closures with ease. The company has also recently commissioned its first retail outlet through the dealer-owned dealer-operated model in Palwal.
Issues and challenges
The CGD segment continues to face challenges related to delays in obtaining permissions from different government agencies. Barring a few states, the ease of doing business in the segment is quite poor. Another issue faced is the multiple levies being charged by the state governments such as road opening permission charge, annual rental charges, property tax, etc. Operators feel that the process of granting permissions needs to be replaced by a dig, reinstatement and intimation process. While the provision of pipeline connectivity to feed the CGD network that has been laid will be a challenge in some GAs, AGL is confident of laying pipelines and getting gas connectivity in at least 9-10 GAs.
Further, the shortage of skilled manpower and contractors as well as limited availability of raw materials in the country is expected to pose a challenge in achieving the ambitious targets set. However, the operators feel that the ninth and tenth bidding rounds have taken India’s CGD business to a different level. A number of global players are coming in and several domestic vendors are also expanding their presence. With regard to manpower, the existing entities have a good talent pool and have been continuously adding to their bench strength. Therefore, both AGL and GGL do not see it as a major hurdle coming in the way of their expansion. While there is a perception that the domestic business is not profitable, GGL believes that operational excellence is the key to reducing costs and increasing profits in this segment.
Any change in the favourable tax regime for the segment will adversely affect its profitability. However, given the government’s vision of setting up CGD infrastructure on a large scale, the operators do not expect such changes in the near future. Lastly, large CGD players do not perceive open access as a major threat.
The way forward
In the next couple of years, the sector will witness consolidation with financially sound players acquiring the smaller ones. Due to the imposition of penalties, only serious and competent players will stay. Going forward, as competition stiffens, CGD companies will focus on providing better customer services at CNG retail outlets to improve profit margins.
Based on a panel discussion among Suresh Manglani, Chief Executive Officer, AGL and Nitin Patil, Chief Executive Officer, GGL, at a recent India Infrastructure conference