Financial Accounting | YLP - 3, IIM-Bangalore

Review of Management Discussions & Analysis for Indian Natural Gas

Trading & Distribution Companies

Team Members, Roles and Companies in Focus (Group – 12)

Name Roll Number Company under study

Ashish Choudhary BYW0511 Team Leader
Manisha Singh BYW0579 GAIL (India) Limited Team Member
Mohammed Zahrin Bin Aziz BYW0290 Petronet LNG Limited Team Member
Pranay Kapoor BYW0578 Indraprastha Gas Limited Team Member

Executive Summary

All companies registered under Ministry of Corporate Affairs submits an Annual report to the MCA
and all the public companies are bound to make the report public by publishing their annual report on
their website. This report gives the stake holders or the public a clear picture on how the company is
performing financially or otherwise. This report consists of various sections which focuses on
different aspects and parameters of companies performance during the financial year.

One of the important section of this report is Management Discussion & Analysis, generally referred
to as MD&A. This section gives an analysis of company’s business, results of operations and
financial conditions through the eyes of management.

The MD&A gives us a brief about Company Overview, Industry trends (both Domestic as well as
International), Market Analysis, Company Performance Analysis , SWOT Analysis and so on.

Introduction

In this report we are reviewing the Management Discussions & Analysis section of the annual report
published by three Indian Natural Gas Trading & Distribution Companies. The companies are as
follows:
• GAIL (India) Limited
• Petronet LNG Limited
• Indraprastha Gas Limited

Objective

Key objective of this report is to access how the future economic and industrial environment would
affect the performance of the above mentioned companies in the future. We would look into the
present performance of these companies and tally with how MD&A projects the future of the
company.

1 GROUP – 12
 Financial Accounting | YLP - 3, IIM-Bangalore

Analysis & Body

Company Snapshot:

1. GAIL (India) Limited: GAIL was incorporated in August 1984 as a Central Public Sector
Undertaking under the MoP&NG. Company made a capex of 4,080 crore during the FY 2017-
2018. There was an increase of 10% in the turnover from last FY amounting to Rs. 53,690
crore, which is the highest PAT for the company. The reserves were at Rs. 32,947 crores as
compared to last year of Rs. 30,996 crore. On 31st March 2018 the net worth of the company
was Rs. 35,142 crore. The debit-equity ratio improved from 0.16:1 to 0.06:1 as compared to
last year. Loan amount of US$33 million were repaid to foreign banks. Market Capitalization
was Rs. 74090 crore which indicates more investors investing in the company.

2. Indraprastha Gas Limited: Established in 1998 and currently spread across NCT of Delhi and
NCR – Noida, Greater Noida, Ghaziabad, Rewari and Gurugram, IGL is a city gas distributor
supplying natural gas to transport, domestic, commercial and industrial customers. IGL is a
joint venture promoted by GAIL and BPCL. Govt. of NCT of Delhi is a stakeholder with 5%
equity. The gross turnover of Rs.4052.14 crores for the year ended March 31, 2016 showed
an marginal increase of 0.1% over the previous year turnover of Rs.4,048.58 crores. The
increase of 0.1% in the gross turnover, despite an increase of 4.4% in sales volume, is mainly
on account of the reduction in the selling price of Compressed Natural Gas (CNG) and Piped
Natural Gas (PNG)-domestic, due to allocation of additional domestic gas to the City Gas
Distribution (CGD) sector, resulting in a lower input cost of gas which was passed on to the
customers by reducing the selling price of CNG and PNG-domestic during the year.

3. Petronet LNG Limited: Petronet LNG is at the forefront of India’s all-out national drive to
ensure the country’s energy security in the years to come. Formed as a Joint Venture by the
Government of India to import LNG and set up LNG terminals in the country, it involves
India’s leading oil and natural gas industry players. Their promoters are GAIL (India) Limited
(GAIL), Oil & Natural Gas Corporation Limited (ONGC), Indian Oil Corporation Limited
(IOCL) and Bharat Petroleum Corporation Limited (BPCL). The annual turnover during
financial year ended as on 31/03/2018 was Rs.30916.02 Crores. This was an increase of 24%
when compared to the previous financial year.

Global and Indian Natural Gas Industry

• The consumption of global natural gas has been steadily increasing over the years – with
consumption and production growing by 3% and 4% respectively in 2017. Currently 24% of
world’s energy mix comprises of Natural Gas.
• In the coming years, gas industry will be driven by imports from China, increasing demand
from industrial sector, rising production from US and by emerging markets.
• While there is thrust by the Indian govt. to increase the share of natural gas to 15%, currently
it constitutes 6% of energy mix of India with presence in CNG and PNG.
• Primary factors that will influence India to become a gas-based economy: Transportation
connecting under-served Eats region with rest of the county. Development of LPG terminals,
managing storage capacity. Incorporation of gas trading platform.

2 GROUP – 12
 Financial Accounting | YLP - 3, IIM-Bangalore

Key points impacting the global market trend

• Shrinking Terms of Contracts: In 2017, the average LNG tenure contract was just 6-7 years.
This constitute of 60% of the total contracts executed that year. 5 contracts in 2017 were of
11-15 years and only 1 contract was of 16-20 years tenure period. In 2014, the average LNG
tenure contract was 15 years.
• Decline in contract volumes: Earlier LNG volumes were sold under long term contracts and
no destination flexibility but in 2017 large volumes of LNG were sold under short term
contracts or on spot market.
• LNG Pricing – Contract pricing shifting back to oil: In 2017 there was 30 contracts signed
out of which 14 were for oil, 3 for Europe gas hubs and 2 were Hybrid. In 2017, the LNG
prices were linked to the oil pricing rather than from the traditional gas hub, LNG indices and
hybrid mechanism. This was again due to the uncertainty in the global markets and no formal
agreements in the economy.
• Lack of project development: Financial institutions prefers giving credit to projects which
have long term contracts but the trend in 2017 was that many buyers preferred short term
contracts (5-7 years) and small values due to market uncertainty. There has been
recommendation to financial institutions to restructure the policies in terms of lending by
taking more calculated risks and innovative pricing formulas, contract terms and flexibility.

Key points impacting the Indian market trend

• By 2040, Indian economy is expected to grow 5 times the current size according to
International Energy Agency (IEA). Primary reason for this aggressive growth is due to the
increase of the Indian population which will overtake China by early 2020’s
• BP statistical review of World Energy shows 5.5 % as total market share of India globally.
• Coal and oil contribute major in India’s energy segment but due to environmental concerns
the Government is looking to promote natural gas in the coming years.
• India aims to reduce the emission target of 33 to 35 % by 2030 under the Intended Nationally
Determined Contributions (INDCs) which comes under the United Nations Framework
Convention on Climate Change (UNFCCC).
• Trends in India suggest that natural gas usage will remain marginal when compared to coal
and oil.
• By 2022, the current Indian Govt plans to double the share of natural gas in the energy sector
by 15%. This would be possible only by huge increase in the LNG imports and constructions
of more LNG terminals across India.
• India currently has 4 terminals to receive LNG and by 2024 there are plans to build additional
10 terminals.
• India wants to eliminate the usage of burning wood for lighting, cooking and heating in
domestic household and provide electricity instead.
• In 2017 power sector and domestic gas constituted about 80% of the gas consumed and
Regasification of LNG (R-LNG) was just 20%.

References:

1. https://www.iglonline.net/english/5000_media/Investor_Relations/Annual%20Report%20201
7-18.pdf
2. http://gailonline.com/pdf/InvestorsZone/AnnualReports/Annual_Report_2017_18.pdf
3. https://www.petronetlng.com/PDF/AnnualReport2017-18.pdf

3 GROUP – 12