Informist, Thursday, Sep 5, 2024
--Gujarat Gas MD: Rejig of 3 state cos to create multiple synergies
--CONTEXT: Gujarat Gas MD Torwane in interview with Informist
--CONTEXT: 3 Gujarat govt energy cos to merge with Gujarat Gas
--Gujarat Gas MD: Merger best way to create shareholder value
--Gujarat Gas MD: Rejig of cos not a burden as all firms debt free
--Gujarat Gas MD: Avg PAT of 3 merged cos 10-12 bln rupees/yr each
--Gujarat Gas MD: To tackle pay disparity among employees of 3 cos
--Gujarat Gas MD: Natural gas to stay core business for co
--Gujarat Gas MD:To explore green hydrogen, renewables simultaneously
--Gujarat Gas MD: Co’s sales volumes currently at 9-12 mscmd
--Gujarat Gas MD: Post restructuring, volumes seen at 15-20 mscmd
--Gujarat Gas MD: Dependence on Morbi ops to reduce post rejig
--Gujarat Gas MD: To add GSPC’s fertiliser, power customers
--Gujarat Gas MD: Gujarat Petro FY25-FY26 capex seen 35 bln rupees
--Gujarat Gas MD: To spend 50 bln rupees as capex over 3 years
--Gujarat Gas MD: GSPC has 72-bln-rupee loss on books
--Gujarat Gas MD: To finalise 2-3 long-term LNG import contracts
--Gujarat Gas MD: CNG demand growing 12-14?GR
--Gujarat Gas MD: To add 200 dealer-owned CNG stations in two yrs
By Sunil Raghu
AHMEDABAD – The proposed merger of Gujarat government-owned three energy companies with Gujarat Gas Ltd is the best way to create value for shareholders, Milind Torwane, managing director of Gujarat Gas, told Informist in an interview. The board had considered several options before deciding on the merger, he added.
The merger is aimed at improving synergies and capturing the opportunities emerging in areas such as new energy business, he said.
"The ultimate objective was to give best value to investors. Second was to ensure long-term future of the company," said Torwane, who is also the managing director of Gujarat State Petroleum Corp Ltd and the joint managing director of Gujarat State Petronet Ltd.
On Aug 30, the Gujarat government had proposed the re-organisation of its natural gas business held through various entities--the exploration and production and gas trading firm Gujarat State Petroleum Corp Ltd, or GSPC, the gas transmission firm Gujarat State Petronet Ltd, the gas trading firm GSPL Energy Ltd, and the pure-play city gas distribution firm Gujarat Gas Ltd.
The reorganisation is through a merger of all these entities into Gujarat Gas Ltd. Once the merger is complete, the pure play gas transmission company will be demerged and listed separately as GSPL Transmission Ltd. This exercise will be completed by August 2025.
The swap ratio is set at 10 shares of Gujarat Gas Ltd for 13 shares of Gujarat State Petronet Ltd and 10 shares of Gujarat Gas Ltd for 305 shares of Gujarat State Petroluem Corp Ltd. Gujarat State Petronet transmission business is valued at 35 bln rupees and Gujarat State Petroluem Corp’s business is valued at 21 bln rupees in the merger.
The merger is a strategic move to consolidate expertise, Torwane said, adding that it will help reduce operational redundancies, improve margins by improving pricing power, expand market reach, and position the combined entity to better meet growing energy demands. It will also help the merged entity efficiently implement the capex of 50 bln rupees over the next three years and capitalise on both traditional and emerging energy opportunities.
Following are the edited excerpts of the interview:
Q. Why undergo this restructuring process now? Why not earlier or later?
A. In fact, the companies existed in current structure for nearly 10 years. The last restructuring of Gujarat Gas happened when Gujarat State Petronet Ltd, or GSPL, took over Gujarat Gas shares in 2012. So GSPL valuation had this holding company discount of nearly 220 bln rupees. There was a long-pending demand from its investors to simplify the structure.
Now, over the years, these three major companies--Gujarat State Petroleum Corp, Gujarat State Petronet Ltd and Gujarat Gas Ltd--are debt-free. Secondly, over the last two-three years, their average net profit has been around 10 bln rupees-12 bln rupees per annum each. So any combination, merger, demerger or amalgamation will not burden any one particular company. This is one of the reasons.
Secondly, the energy sector has its own challenges and opportunities. To be able to take on these challenges and opportunities, we felt it is better to restructure the group and create multiple synergies. That is why the board of directors decided that this was the right time.
Q. What are these challenges you are talking about?
A. We are talking about green hydrogen, renewables and phasing out of carbon fuels. These are still getting conceptualised and being talked about for two-three years. So these are the challenges, where you need to transition from one form of energy to the other.
We are in the field of natural gas, a transient fuel. The world is not going to shift directly from fossil fuel to clean fuel or renewables. In between, transition is happening through natural gas. Naturally, we want to benefit from this transition.
Q. What multiple synergies would restructuring create?
A. As of today, nearly 40-50% of the GSPC's natural gas sales portfolio of nearly 16-18 mscmd (million standard cubic meters per day) consists of sale to Gujarat Gas. Other than that, there are large consumers. So these large consumers and customers will be going to Gujarat Gas.
Currently, Gujarat Gas sells 9-12 mscmd of natural gas, depending on demand. Of this, 3 mscmd goes to CNG market. Another 3.5-4.0 mscmd goes to Morbi ceramic tile makers, 1.0-1.5 mscmd to non-Morbi industrial market, and the rest to residential and commercial consumers. Post restructuring, total sales will rise to 15-20 mscmd, as all the existing GSPC customers, including fertiliser and gas-based power entities, would become Gujarat Gas customers.
This will somewhat reduce significant dependence of Gujarat Gas on Morbi ceramic tile makers, who switch to alternate fuels as propane and LPG whenever gas prices rise.
So Gujarat Gas will now look at retail, consumer, industrial and those large customers in power and fertiliser sectors. This will widen and deepen Gujarat Gas customer base and flexibility to lower price and capture Morbi market with alternate fuels.
Q. How will the margins be post-merger?
A. The margins will also be on the higher side, as GSPC in some cases charges up to 30% margin for selling gas to Gujarat Gas. Going forward, it will be one company sourcing gas and using it. So there will be no margin sharing.
Gujarat Gas will have more cash flow. It being a debt-free company and with more cash flow, it would be able to take up more capital work. So the overall effect will be that we will have an expanded market.
Secondly, on the sourcing side, GSPC has long-term contracts to source LNG and domestic gas till 2027, 2028. There are very few LNG importers in India due to size and complexity of the international market. Hardly five or six. GSPC has imported nearly 400 cargoes in the last 15 years.
It is now in the process of finalising two-three more long-term contracts for 10-15 years, beginning 2026. These will be under Gujarat Gas directly. So that is the additional strength.
Q. How about the Gujarat State Petroleum Corp losses that are to be carried in to the new entity?
A. Gujarat State Petroleum Corp has nearly 72 bln rupees of carry forward losses, which can be offset against future profit for next three years as per the law. So, the new entity could earn a higher net profit but need not pay tax.
Moreover, Gujarat government, along with its entities, will own a 55% stake in the new entity. The new simplified structure will offer an option to sell stake or induct strategic investor in the entity with ease.
Till we get approval from the Securities and Exchange Board of India and other regulators, all the three companies would continue as they are. Once the formal approvals come, there will be two companies--one in exploration and production, trading and city gas distribution that is Gujarat Gas, and the other will be a transmission company GSPL Transmission Ltd. Gujarat State Petroleum Corp Ltd will cease to exist. This would take till August 2025.
Q. What is the future of transmission company Gujarat State Petronet?
A. For the transmission company, there will be no significant change in the sales and the volume. But it will be a very simple structure, where it can devote more time to developing more connectivity and finding out more opportunities to lay down additional gas pipeline network.
GSPL has already lined up 7-8 projects in next two-three years. It has planned capital expenditure of 30 bln rupees. These projects will give additional revenue and probably add to the volumes of GSPL.
Q. What is growth of Gujarat Gas now and how much would it grow going forward?
A. It all depends on the demand. The oil and gas market is highly dependent on the global market scenario. So there is a volatility. But natural parameters that are visible point out that good things are going to happen after 2026, 2027, 2028. These are huge liquefaction facilities that are coming up in India. The availability of LNG will be on the higher side and most probably prices would come down and there would be a good demand and more consumption.
In the retail segment, we have 800 CNG stations currently. We are planning to add another 200 in the coming two years, all dealer owned, dealer operated CNG stations. What we are seeing is that number of CNG vehicles is growing at 12-14?GR. With those many vehicles coming on the roads, CNG demand would also grow by that percentage. So it is a good combination. The natural gas demand we see after 2025-26 onwards, it is going to be good.
Q. What about investments in companies such as GSPC LNG Ltd, GSPL India Gasnet Ltd and GSPL India Transco Ltd?
A. GSPL India Gasnet Ltd owns 765-km Mehsana-Bhatinda natural gas transportation pipeline and GSPL India Transco Ltd was formed to set up 1,450-km pipeline from Krishna Godavari basin in Andhra Pradesh to Bhilwara in Rajasthan. Both these companies will be transferred to GSPL Transmission Ltd.
Rest would be under Gujarat Gas. These include GSPC LNG Ltd, which has a 5 mln tn per annum LNG terminal at Mundra, two gas-based power plants--700 MW of GSPC Pipavav Power Co Ltd and 350 MW Gujarat State Energy Generation Ltd--and a few renewable power plants of 100 MW.
For GSPC, not a single unit is making losses. GSPC LNG Ltd is debt-free. GSPL India Gasnet Ltd has some debt but that is a separate entity and so far is able to repay debts on its own.
Q. Why is Gujarat State Petroleum Corp part of restructuring? Gujarat State Petronet and Gujarat Gas could have just sold cross-holding and separated?
A. Good question. See Gujarat State Petronet Ltd was holding Gujarat Gas Ltd shares. Now if we merge both, it is a violation of regulation which says that retail and transmission cannot be together.
The other could have been, just merge Gujarat State Petroleum Corp Ltd and Gujarat Gas Ltd. In that case, it is the cross-holding which would have happened. There were like six or seven combinations that were tried by the board. A sub-committee was formed and after a lot of deliberations this was found to be the best option available. The ultimate objective was to give best value to the investors. Second was to ensure long-term future of the company.
Q. What is the rationale behind Gujarat State Petroleum valuation at 210 bln?
A. Two companies are listed so there is no issue. GSPC is not listed. These are state public sector undertakings. Our books are audited by Comptroller and Auditor General-appointed auditor every year. All the valuations in the books of these companies are audited by the Comptroller and Auditor General.
Secondly, we appointed two independent valuers to have a fair valuation. We then had two merchant bankers to give fairness opinion. So a fair exercise of merger-demerger is being followed. The accounting treatment is certified by CAG-appointed auditors as per the Companies Act and SEBI norms. The 210 bln rupees valuation is what the merchant bankers have certified.
Q. There is a disparity in pay of Gujarat State Petroleum, Gujarat State Petronet, and Gujarat Gas employees? Many have quit in the recent past? How will that be taken care of?
A. The disparity will be taken care of. We are right now 1,200 people in Gujarat Gas, around 250 each for Gujarat State Petroleum Corp and Gujarat State Petronet. So our strength would be around 1,700. We are not looking at any layoffs. For employees, it would give better opportunity to grow horizontally and vertically.
Mergers and demergers are not new to the industry. Here also, it is only restructuring. Here the group has not disowned any business, nor is it acquiring any new business. It is a simple reorganisation. We shall have a good human resources function.
Q. Would growth come from traditional segments or newer sectors?
A. Newer sectors will take time. Industry such as electric vehicles, green hydrogen, renewables are still in their nascent stage and their ecosystem is still developing. So in the coming years, it will be our traditional, continuing business, which is natural gas.
India has a target that natural gas should be 15% of its energy basket by 2030. At present we are around 6.5%. So natural gas has a lot of scope to expand. We would be riding on that. Side by side, we would be looking at other opportunities.
Q. How much capex is planned for next few years?
A. GSPL has already announced a capex of 35 bln rupees for 2024-25 and 2025-26 and Gujarat Gas another 12 bln rupees. With GSPC we would look at additional capex once the merger is complete. For next three years, we are looking at 50 bln rupees in capex for Gujarat Gas.
Q. What is the biggest challenge and opportunity you see to this exercise?
A. The challenge is to cater to the new energy market. The energy scenario is changing fast and how to make the company ready and available to take up the challenges is one big thing.
If we take up the challenges, we will have opportunities.
In the natural gas sector, we are the number two company now. Independently, Gujarat Gas is the leading city gas distribution company in the country and along with Gujarat State Petroleum Corp it will have second-highest portfolio size for natural gas. So considering the reach and saturation of the current business, naturally there is a good scope for other energy sources. So, the company would be looking into those.
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Akul Nishant Akhoury
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