India is a developing economy and its growth hinges upon the adequate availability of energy resources in the country. Natural gas is thus going to play a pivotal role in the economic development of the country. Also, the demand for natural gas has outstripped supply owing to it being environment friendly fuel in addition to it being cheaper fuel (compared to other fuels in terms of calorific value). One of the key players in this segment is Gujarat Gas. In this write up, we analyse the business segments of the Gujarat gas and growth potential of these segments.
What is company's Background?
Gujarat Gas Company (GGCL), a 65% subsidiary of the global gas major British Gas, is India's largest private sector gas distribution and transmission company and has a regional presence across three of the largest industrial cities in the state of Gujarat. With a pipeline network of over 2,000 kms (nearly 35% of GAIL's gas pipeline network), the company caters to industrial (for their energy requirements), domestic (piped natural gas or PNG) and automobiles (compressed natural gas or CNG) in the cities of Surat, Ankleshwar and Bharuch. Currently, company is building pipeline network in Vapi. GGCL supplies approximately 3 million standard cubic meters per day (MMSCMD) to 1.7 lakh domestic, 2,200 commercial, 30,000 automobiles, and 650 industrial customers.
GGCL pioneered the concept of gas distribution to industrial, commercial and domestic customers in Ankleshwar and Bharuch in 1989 and later expanded to Surat in 1991. Company has two subsidiaries- Gujarat Gas Financial service limited, subsidiary formed to help customer switch to natural gas and thus provides credit for the same and Gujarat gas Trading Company Limited (GTCL), a 100% subsidiary of GGCL acts as a licensed dealer for selling gas to bulk industrial customers.
Apart from gas distribution, company also transmits gas for the other players for a transmission charge. But the business has been volatile and has not contributed to the topline and bottomline on a consistent basis.
Business model of Gujarat Gas
Gujarat Gas is first private player to venture into the gas distribution and marketing space. It sources gas majorly from the private players (with well diversified sourcing base). The major suppliers of gas to the company are GAIL (5%), GSPC (22%), CAIRN
(34%), NIKO (13%), R-LNG (3%) and PMT (21%). Diversified sourcing of gas enables the company to diversify the risk associated with the sourcing. Company has done well on the sourcing side, given the constraints on the supply side in the country; it has added 1 supplier every year since 2002. It contracted CAIRN in 2002, NIKO in 2003, R-LNG in 2004 and PMT in 2005. The gas purchased by the company is largely at the market-determined prices. The purchased gas is then sold to various user industries, majorly pharma, chemicals, textile and diamonds.
The gas users are classified under bulk industrial, retail industrial, commercial and domestic segment. The customer mix for the company has changed drastically with retail contributing significantly to the total volumes of sales. Bulk industrial, which contributed 76% of the total volumes in CY02, now contributes only 25% of the total volumes. Thus, the share of retail industrial has gone up. Company expects the business mix to remain stable over the next few years. Inspite of concerns on the margins front, the company has delivered good set of numbers. The increased share of industrial retail, along with relative cost of natural gas vis-a-vis other fuels has kept the core margins of the company at decent levels.
Gas transmission business of the company has taken a hit post GSPCL establishing its own transmission lines. The business, which accounted for 9% of the total gross revenues in CY04, started to decline and stood at 5.4% in CY05 and the scenario this year has even worsened with no revenues coming from this segment.
Gujarat Gas currently operates 15 CNG outlets (majority in Surat). Also, the government of Gujarat has made CNG mandatory for auto rickshaw from 1st January 2006, which has had a positive impact on volumes (incremental additions likely to be lower). To capture the required scale of operations, the company plans to double its CNG outlets. Company expects its thruput per outlet in the range of 12,000 kgs to 15,000 kgs. Segmental revenues from the CNG business are expected to increase to 10% of total revenues from the current level of 5%. Margins in this segment are higher (double) as compared to the industrial business. Thus the increased revenues from the segment along with above average margins will boost the profitability of the company going forward.
GGCL recently acquired cogeneration power business from BG India Energy Services Private limited at an NAV of Rs 109 m. The acquired plant has a capacity of 20 MW. In the long-term, the company hopes to add around 20 MW per annum (these units are for captive consumption for small to medium enterprises and the ticket size of the captive facility can be as small as 4 MW). While the company will be running and managing such captive units (for which it will earn a lease income), it also aims to sell natural gas to power the Cogen facility. This inturn will increase the value-chain presence of the company in the long-term and a consequent improvement in margins. The management expects to earn an internal rate of return of 15% from the project. Internationally, the gas distribution and transmission companies are integrated and earn higher margins due to wider presence in the value-chain.
Gujarat gas also supplies PNG (Piped natural gas) to the domestic consumers. Volumes in the segment have increased from 39.4 MMSCMD in FY02 (million metric standard cubic metres per day) to 48.4 MMSCMD in FY05, however the share in the total retail volumes has declined form 10% to 8%.
Gujarat Gas has a robust business model right from the sourcing to marketing of the natural gas. However, the constraints on the lower supply of the natural gas along with revenue loss form the transmission business can affect the company. However, company is trying to increase its focus on high margin business like CNG to offset the revenue loss from transmission business. With the fall in crude oil prices, the gas prices are also likely to reduce, thus margins will continue to be good in the core business. However, supply constraint in the domestic markets will cap the growth prospects of the company over the medium-term.