ABC LIMITED: OFFLINE CNG COMPRESSORS

Introduction:

At ABC’s monthly meeting in September 2019, Mr. Pradeep Shukla, the company’s president,
expressed concerns about the increasing competition in the City Gas Distribution (CGD)
segment. His specific worry concerned around the current online CNG compressor market,
raising apprehensions about the possibility of future stagnation. “I know we are operating at
capacity in Gas Compressor distribution,” he remarked to Mr. Deepak Sharma, Business Head
- Gas Compressor Division (GCD). “But surely there’s room for improvement in our overall
business position. Perhaps, we should consider reviewing our relationship with the downstream
users in the oil and gas market. Is it possible that the situation could be altered by entering the
offline CNG compressor market? Why don’t you have a meeting with your division champions,
explore different options, and formulate a recommendation.”

ABC: The Company and Its Background

ABC, a pioneer in engineering conglomerate in India, was founded in 2005 dedicated to

delivering high quality engineering products in the domains of gas and air compression, air
conditioning and refrigeration, process gas systems, and spare parts sales. With the noteworthy
expansion of gas compressors in the Indian market over the past three decades, the Gas
Compressor Division (GCD) has emerged as a pivotal segment for the company. GCD’s core
focus revolves around its flagship product - CNG compressors. In addition to catering to CNG
applications, GCD extends its services to non-CNG applications within the oil and gas sector.
In the fourteen years leading up to 2019, GCD achieved a remarkable milestone by securing an
impressive 50% market share in the CNG Compressor industry. This achievement resulted into
a substantial business turnover, reaching INR 200 crores as of 2019. Notably, the breakdown of
GCD’s overall turnover reveals a distribution of 60% from CNG compressor sales, 30% from
the oil and gas sector, and 10% from spare parts sales. Impressively, since its inception, GCD
has experienced a tenfold growth (Exhibit 2).

Three Amigos Forum: Meeting of the GCD Head, Sales Manager and Product Development
Manager.

In his opening remark On October 2019, Mr. Deepak Sharma emphasized the significant role
of GCD within the company, highlighting its expertise and alignment with ABC’s business
strategy that prioritizes aggressive business growth. Notably, the company has recently invested
INR 20 crores from its revenue to establish a new business line.

“While we are presently performing satisfactorily, we are confronted with several challenges in
our current format. The entry of new players into the market, leveraging low cost and shorter
This case contains proprietary and confidential information. Any erroneous and/or any unauthorized usage, reproduction, or illegal usage of the given information
is strictly prohibited and considered mala fide and may lead to legal consequences.
delivery time, poses a threat. These competitors are enticing our customers and encroaching on
our market segment, potentially resulting in a reduction of GCD’s market share in the online
CNG compressor business in the upcoming years”, Mr. Sharma added.

Mr. Sharma further referenced a forecast projecting that approximately 55% of the total demand
for CNG compressors will be directed towards offline units (Exhibit 4). He asserted that
delaying the entry into this offline business segment could hamper overall business growth and
strongly recommended initiating implementation. While GCD may lack direct experience in
offline CNG compressors, its extensive experience in supplying online CNG compressors can
facilitate a seamless entry into this sector.

“I've recently observed a global trend where countries are actively seeking to reduce their
dependence on crude oil, with a pronounced shift towards natural gas,” began Mr.Srinivasa, the
sales manager. “In light of this, demand for both online and offline CNG compressors presents
a compelling opportunity. From my perspective, offline CNG compressor holds greater
promise, given that the industry remains largely unexplored by many. I wholeheartedly support
Mr. Sharma’s recommendation and I propose that we seriously contemplate introducing offline
CNG compressors to tap into this somewhat uncharted market”.
Petroleum and Natural Gas Regulatory Board (PNGRB), a statutory body of India have
allocated 52% of geographical area in the country to various City Gas Distribution (CGD)
companies. These CGD companies play a pivotal role in laying gas pipelines, establishing CNG
filling stations and facilitating household gas connections within their designated areas.
Showing a clear preference for offline stations, CGD companies opt for these as they do not
require direct gas pipelines. They strategically position online CNG stations near existing
pipelines or lay new pipelines close to their allocated regions from the gas grid pipeline.
Cascades, containers for compressed natural gas, are filled at these online stations and then
transported to offline CNG filling stations. Consequently, the setup of offline CNG stations is
faster compared to the establishment of online counterparts. With 42% of India’s geographical
area still awaiting allocation to CGD companies, a substantial market for offline CNG
compressors is anticipated in the years to come.

Satish Yadav, the product development manager nodded with skepticism. GCD sources non-
CNG compressors from Europe and the USA, while its competitors have suppliers in India
producing gas compressors with similar capacity (Exhibit 3). This scenario poses a significant
cost challenge for the division. Regarding competition, entering the offline compressor market
won’t be straightforward, given the presence of three major players in the market landscape.
“Targeting the market share of 30% in offline CNG compressor business over the next three
years seems unrealistic to me”, added Mr. Yadav.

This case contains proprietary and confidential information. Any erroneous and/or any unauthorized usage, reproduction, or illegal usage of the given information
is strictly prohibited and considered mala fide and may lead to legal consequences.
Business Dilemma:

In November 2019, Mr. Deepak Sharma presented a comprehensive overview of the tri-Amigos
Forum to Mr. Pradeep Shukla, outlining a myriad of challenges anticipated in the execution of
offline CNG compressor project. These challenges encompassed enduring competition from
established market players, substantial capital investment requirements, intricate fund flow
dynamics, and the necessity for financial backing from institutions to successfully undertake
the project. The deliberation on the pros and cons reached an equilibrium, placing Mr. Pradeep
Shukla in a pivotal position, as his decision holds significant weight for the offline project. The
quandary revolves around the strategic entry into the offline CNG compressor business,
balancing considerations for long-term and short-term gains. Furthermore, the deliberations
extend to potential disruptions in the global supply chain, project delays, and financial
complications arising from infectious disease outbreaks with a global impact.

Offline CNG compressor cost

Each compressor cost including GST/Tax etc: INR 45 lacs

Questions (All questions are Compulsory):

1. Give detailed business plan for offline gas compressor business

2. To what extent ABC should consider funding from external financial institutions to
reduce the interest amount and expense efficiently?

3. What should be the strategy and ways of operating this new product segment to capture
the market share of 30% over the next three years upon entering?

4. What technological solutions will differentiate ABC from the existing competitors?

5. How should GCD manage its operations around payments made on prorate basis?

Exhibit 1: Financial details of ABC Limited for last five years (In INR)

FY Revenue (Crore) Expenses (Crore) Profit before tax (Crore)

2018-19 600 480 120

2017-18 500 400 100

2016-17 460 369 91

2015-16 410 328 82

2014-15 390 315 75

This case contains proprietary and confidential information. Any erroneous and/or any unauthorized usage, reproduction, or illegal usage of the given information
is strictly prohibited and considered mala fide and may lead to legal consequences.
Exhibit 2: Financial details of GCD for last five years (In INR)

FY Revenue (Crore) Expenses (Crore) Profit before tax (Crore)

2018-19 200 160 40

2017-18 190 154 36

2016-17 170 136 34

2015-16 150 120 30

2014-15 140 112 28

Exhibit 3: Market share of existing players in Offline CNG Compressor business.

Name of existing player Market share % Market Value in Crore (INR)

TPL 50 150

KPL 30 90

HOL 20 60

Total market value of offline CNG compressor business in FY 2018-19: INR 300 Crore

Exhibit 4: Online CNG Compressor Demand Forecast.

Online CNG Compressor Average Demand Forecast per year in next seven years: 700 units.

This case contains proprietary and confidential information. Any erroneous and/or any unauthorized usage, reproduction, or illegal usage of the given information
is strictly prohibited and considered mala fide and may lead to legal consequences.