The government is likely to announce the domestic gas price revision on September 30 this year. The gas companies believe that the prices are likely to go down from the current USD 3.06 per unit. The prices are likely to be in the range of USD 2.40-2.45 per unit on gross calorific value (GVC) basis, says AK Srinivasan, Director - Finance at ONGC. Despite the price fall, ONGC is confident of volumes improving on back of project implementation. While the cut in prices will impact ONGC, players like Gujarat Gas will benefit as volume increases. Fall in gas prices will improve bottomline and margins for the company, says JN Singh, Chairman of Gujarat Gas. Variable cost of power plant too will come down for the company. Gujarat Gas expects volumes to rise in the second half of the current fiscal. The company is now providing gas for shorter duration, which will help too, Singh says adding that it is not envisaging much for big-ticket players.Below is the verbatim transcript of AK Srinivasan and JN Singh’s interview to Latha Venkatesh & Anuj Singhal. Latha: Your divestment, what is the latest? We hear that the government is pretty keen on getting some Rs 10,000 crore by selling its stake in your company this year. What have you heard?
Srinivasan: So far we have not heard anything from the government but definitely the government had already given the cabinet approval on divestment of Oil and Natural Gas Corporation (ONGC) during the last year but presently at what timing etc, it is for the government to take a call and they will definitely tell. So far we have not heard, so we are not aware about what is the movement on that.
Anuj: What we are hearing is the third quarter of the fiscal. Your thoughts on if the timing is right, right now?
Srinivasan: I will not be able to comment much on that whether the timing is right or not, but the government has to take a decision on this particular aspect.
Latha: Gas price should be announced by September 30. What is your sense the new gas price might be? We are getting quite a wide range of USD 2.4 to USD 2.9, what is your own calculation?
Srinivasan: Based on the four markets which as per the notification the gas prices determine and looking at the trends of gas prices across the globe and based on all these four markets, definitely there is going to be a decline but based on the exact calculations by the agencies who notify the prices and we expect the prices to be in the range of about USD 2.4-2.45 till exact numbers are notified but definitely there is going to be a decline from the existing level of USD 3.06 on a gross calorific value (GCV) to USD 2.45 around GCV basis. So, the prices on net calorific value (NCV) basis it is 10 percent more than that.
Anuj: So, what kind of adjustments will you see in your numbers because till last year everyone was assuming a certain level of gas prices and based on that was working out with the earnings per share (EPS) numbers as well. What kind of adjustment do you see going forward with that?
Srinivasan: As far as our volumes are concerned we are definitely going to produce the volumes which are targeted to be done and target to the company is about 24.704 bcm including my joint venture. So, we will be definitely maintaining our position of the gas production and definitely there are going to be a downside on my revenues due to the realisation and every dollar realisation on an annualised basis it impacts about Rs 4,000 crore.
Latha: How do you gain? If it is going to be around USD 2.45 now what is the impact on your bottomline?
Singh: It certainly is going to benefit the consumer since we in Gujarat Gas are selling gas. So, it is going to benefit us quite a bit. As you rightly said somebody's gain is somebody's loss. So, we will be gaining from that gas price.
Latha: Can you quantify that?
Singh: No, I won't be able to do that.
Latha: If it gets passed on does it stick to your margins?
Singh: Yes.
Latha: It does add to your margins?
Singh: Yes.Latha: I was asking you whether it will be passed on because I was wondering a cheaper gas will mean a few more power plant can buy?
Singh: That is very difficult to say because for power plant government has come up with a reverse auction basis thing. So, we expect if power plant takes the gas, our gas consumption goes up and also our sister company GSPL also benefits by the transmission of gas. So, we are quite bullish that if the gas prices come down then naturally the variable cost of the power plant will go down and they will be in a position to supply at least the peak power load in a much better way than what they are doing right now._PAGEBREAK_
Latha: Then why were your volumes down last quarter. Last time also gas prices went down. But you sold less. You sold 13 percent less year-on-year (Y-o-Y).
Singh: Our gas prices have come down because of the other competing fuels prices were cut.
Latha: But volumes fell by four percent.
Singh: Yes, I am talking about that only. The volumes particularly in Morbi Industrial segment went down because the coal gasifiers were there in significant numbers and they were able to poach many of our existing customers. We have taken slightly aggressive steps there and we are trying to see that our earlier customers come back to us. So, that is in the industrial segment and we are also trying to do more in the City Gas Distribution (CGB) segment in a significant way.
Anuj: What is this aggressive step you are talking about and would that mean that margins would have to be compromised going forward?
Singh: Not exactly. Earlier we were looking at very long time deal one year, more than one year. Now we are also telling that if they want gas for even one month, at a slightly higher price also, they can take it. Absolutely cash and carry type of thing, so, that is helping many of the things because ceramics also facing lots of friction and if all of a sudden their demand picks up then they can take from us. If somebody wants to get some more ceramic tiles and all so immediately they can come to us rather than waiting for a long-term demand contract with us.
Latha: You said that you will stick with that 24.7 volume. But in your case what about your overall volume both oil and gas will that be maintained in the current quarter, do you see it improving in this and the remaining quarters?
Srinivasan: Absolutely because when the new projects are under implementation and once they come on the stream, the volumes are likely to be increasing from the current quarters of first quarter to second quarter and onwards once the projects are on implementation. Definitely, overall target have been fixed based on the consideration of the projects coming on the stream, during the year basis.
Latha: Another niggling thought, but this one is on your subsidiary, ONGC Videsh. There was a service tax noticed that was slapped on them, Rs 6,100 crore we were told. Are you all disputing it or are you all paying it up?
Srinivasan: It is only show cause notice which has been issued by the government on those but nothing has been levied on the company to payoff and we are definitely taking it up and we have a strong case on that and basically it has to be debated and discussed across.
Latha: What would therefore the net realisations look like in FY17 you think? Half the year is done.
Srinivasan: During my first quarter my average realisation was about 46.1 in crude oil. Going forward the crude prices are in the range of about USD 46-45. We expect on an average for a year basis crude prices should be about USD 45.
Latha: What would the royalty then work out?
Srinivasan: Royalty is 20 percent for the on land and 10 percent for the off shore which will be based on that pricing.
Latha: You were speaking about your customers can take gas fro you on a cash and carry basis. Are you really going to look at cutting prices, making it more attractive for those ceramics guys or the power guys or even the hot briquetted iron guys? Should we see your volume improve in the second half?
Singh: We should, that would come in the third quarter. Second half for sure, yes. Third quarter and fourth quarter we expect the volumes to go up. These are some of the steps; we are trying to match the prices and trying to woo back our earlier customers. Those who have to produce quality ceramics have to come to this, but certainly we are not envisaging anything for the power customers or the big ticket ones. It is only for the retail customers so to say and the ceramics and others where there is tremendous amount of competition coming up.
Latha: Any other expansion, city gas expansions?
Singh: No, we already got 24 districts and those are the areas where we are looking to expand our gas pipeline. And certainly this is going to help us significantly.
Latha: So, should we just pencil in earnings before interest, taxes, depreciation and amortisation (EBITDA) of Rs 220 crore - that seems to be your run rate?
Singh: That should be there but we expect that once all our expected projects come on pipeline then we should be doing much better.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
