BC Tripathi, chairman and managing director, GAIL says the company has communicated with the government and will not be paying any subsidy burden for Q3, Q4 FY15.
In an interview to CNBC-TV18, Tripathi says the company has already paid Rs 1000 crore towards the oil subsidy mechanism, but it is unclear if it will be exempted from paying the same in FY16.
The exemption from contributing to the subsidy come on the back of record low crude prices, that Tripathi adds will result in highly pressurized product margins.
Below is the verbatim transcript of BC Tripathi's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: Understandably as a commodity company there are problems at a time when commodity prices are falling, can you start by telling us whether you will see a fairly deep cut in the margins both of petrochemicals and liquefied petroleum gas (LPG)?
A: The brent situation globally is so volatile and prices of crude is going down so definitely there is a downward movement in the price of all the products whether it is LPG or a petrochemicals. So there will be pressure in the margins for GAIL as well as on both petrochemical as well as an LPG and there is a significant impact of the subsidy on GAIL on which we are continuously engaged with the government that in the current scenario GAIL should not be asked to bear subsidy burden beyond what we have already done and we have a comfort and assurance from the government that GAIL will be kept out as a subsidy mechanism beyond what we have contributed in this financial year. So that may give some relief to us.
Latha: You are saying that you will have to pay no more subsidies starting this quarter?
A: Yes, that is what our understanding is from the discussions with the government and we expect that the same will be on.
Latha: How much have you paid for the year you have paid only Rs 500 crore. Even Q2 Rs 500 crore will not have to be paid?
A: No, we have already paid Rs 1,000 crore up to Q2. So Q3 and Q4 we expect that there should not be any additional subsidy.
Sonia: So for how long will you be kept out of the subsidy net, will it be only for the rest of the fiscal or for the next fiscal as well?
A: As of now the understanding is that we will be no more a part of the subsidy but we do not know how the oil prices will behave in future and what will be the future course of policy of the government. Therefore as of now our expectation is that we will be definitely out of the subsidy mechanism.
Latha: The oil ministry and the government have been talking about new pricing formula, we haven’t heard anything much concretely. Can you enlighten us anything more? You have been told that you probably will be out of the subsidy mechanism for good, anything else you can share?
A: That is yet to be decided, that is under consideration of the government because probably the way they maybe waiting and watching how the crude further behaves in the coming days, so there is not yet much clarity on that at the company level but discussions are on in the government.
Latha: So just to clarify what you have said so far, you have complete assurance that you are not paying subsidy this year, you have any assurance about next year?
A: The assurance as of today is beyond this year we should be out of the subsidy even for the coming year as well but as I mentioned that you do not know how the international crude prices will behave and what will be the correction in days to come but today expectation is like that.
Sonia: If we assume that you won’t have to pay any subsidy for FY16 as well then that will be a significant jump to your earnings performance, can you give us an indication of how your earnings will follow through from hereon for the next one-two years?
A: The overall basket of various portfolio of GAIL if you look at we have gas trading, we have gas transmission, petrochemical and LPG but there are issues in terms of the lower capacity utilisation of pipelines, which we have built over the last three-four years and the new major investment especially in downstream fertiliser, the sector is yet to happen but the issue is what will happen to the gas pooling and whether the existing standard gas based power plant will come back on the stream, it will depend upon that but definitely our price tariff for pipeline transportation is now next due for revision, which will be effective for the next financial year. So that will definitely improve our margin to a certain extent but capacity utilisation or pipeline will still remain a concern.
Latha: What are the volumes you would have transmitted in Q3 and how much in Q4?
A: Our transmission volumes are down to the extent of almost 20 percent as compared to the previous year because of low gas production and that is the reason that this Q3 and Q4 also will have pressure as far as the transmission volumes are concerned but we expect going forward once the decision is taken by the government on gas pooling for power sector, probably this will improve.
Latha: Can you still give us the idea of how much the volumes will be?
A: Volumes will be somewhere around 96-97 million standard cubic meter per day on an average.
Latha: What about Ratnagiri Gas, what have you heard latest from the government?
A: The latest that we are looking at the current situation when the energy prices are low, we are discussing with all these stakeholder including the lenders that this is the right time for us to bring Ratnagiri back on stream and the power generation cost will be comparatively lesser at this point of time.
Ratnagiri has a special advantage because it is integrated power plant with the LNG terminal. It need not pay any custom duty, it doesn’t have any transportation tariff so therefore this is the least cost of imported gas, which can be supplied to Ratnagiri. So we are continuously interacting with the Maharashtra government and other offtakers also that it is a national asset whether the power is consumed by Maharashtra government or the power can be supplied to any other state. So discussions are on with all the stakeholders. We expect some development in this in next week.
Latha: But has Maharashtra government agreed to buy the gas at Rs 5.50?
A: That is what we are discussing with them and we are still waiting for their response and we have requested Maharashtra government that if you are not interested to buy power at Rs 5.50, which is your contractual and commitment as per the power purchase agreement (PPA) then there should be a permission given to the Ratnagiri to supply this power to other states in Southern India.
Sonia: We were going through brokerage reports and estimates suggest that your profits in the near-term could decline about 60 percent quarter-on-quarter (Q-o-Q) to Rs 530 crore or thereabouts because of the fall that we are seeing in crude etc, is that a fair estimate?
A: Our Q3 results are yet to be finalised, it will not be fair on my part to give you this assessment but definitely there are pressures in terms of the lower prices of petrochemical and LPG.
Latha: When will a package for Ratnagiri be known, is there any deadline you are working for?
A: The first priority for us as far as Ratnagiri is concerned is to avoid the asset going on NPA and secondly to see that how we can bring it up as early as possible. We expect that a couple of weeks from now, we should be in a position to take a final view on that.
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