Aim to make IGL a billion dollar company in next 5 years
Shri Rajesh Ved Vyas, Managing Director, Indraprastha Gas Limited (IGL); January, 2011
We engage Mr. Rajesh Ved Vyas, Managing Director, IGL to find out what are the new goals that IGL has set for itself as it celebrates its 12 years of operations. In a freewheeling discussion, Vyas shares with us the typical problems IGL faced while laying the India's first city wide gas distribution network, his optimism when he says IGL does not see any worthwhile competition coming up in Delhi, his pessimism on PNG coming out as a sustainable business model and his concerns regarding the high incidence of taxes blunting the advantage of CNG over petrol. Vyas, having joined the organisation just two years back, from GAIL's Hyderabad office, shares IGL's plans for expansion and its commitment to explore new territories in next couple of years. At the same time, he elaborates on immediate challenge s that CGD business faces in general and IGL in particular.
Question What are the goals and priorities that IGL is setting for itself as the company celebrates its 12th anniversary?
Answer: We have been in the CGD business in NCT since 1998. As part of our expansion plans, we recently moved out of NCR to the neighbouring towns. Our focus is to expand in these geographic areas (Gas) covering all the segments of gas be it PNG (piped natural gas), LNG (liquefied natural gas), used for domestic or commercial purposes.
We are very aggressive with our expansion plans. Our main focus is to further widen our reach. When it comes to expanding our business, we have a keen interest in the northern part of the country. Managing businesses that are too far from Delhi will be difficult for us.
Besides these, we are venturing into some overseas projects as well. These projects are in initial stages and we are examining them. IGL is also actively and successfully bidding for new tenders announced by PNGRB (Petroleum and Natural Gas Regulatory Board) from time to time.
We are determined and confident that IGL will be a USD 1 billion company by 2015-2016.
Question: Being the first and only player in CGD business in Delhi, what were the challenges that IGL had to face to establish and expand its network?
Answer: There are lots of challenges that an organisation has to face while building infrastructure for CGD business.
Speaking from personal experience and my association with GAIL for a pipeline project from (????) to Bahadurgarh, I can list out number of challenges that one has to grapple with while pursuing CGD projects. Though these challenges are not IGL specific but these will give you ideas as to what hurdles one has to overcome while pursuing a project.
First and most importantly, land ownership rights for a stretch of land are with multiple municipal authorities such as MCD (Municipal Corporation of Delhi), NDMC (New Delhi Municipal Corporation) and so on. As for these authorities, having a gas pipeline is their last priority, it takes ages to get their nod and go ahead with the project. Secondly, one has to work within a number of limitations. For instance, while pursuing the above mentioned project, we had the permission to dig the road leading up to Wazirabad only during the night restricting our ability to finish the work on time. Then there are questions related to availability of technology. Few years back, trenchless technology to cut through the road was not in vogue. With narrow roads leaving the digged area open for x-raying of joints of the pipes at a later stage presented us with its own dangers. Encountering hidden water, sewage drains are some of the other big hazards while pursuing a project.
Then there are other issues related to urgency and preference accorded to the project in Question: During my tenure with GAIL, the Bahadurgarh-Sonepat-Delhi industry was not considered important by the then Delhi government; so the government did not exhibit any urgency to speed up the project.
Later, it was with the support of Haryana government that resulted in the project seeing the light of the day. It took us 12 years to complete a mere 12 km pipeline.
Question: How do you tackle and overcome such hurdles and move ahead with your projects?
Answer: To get things moving, one has to approach different authorities at different levels. It could be the authority at the actual site, at central secretariat level or bureaucratic level. Sometimes one has to create pressure from the ultimate beneficiary authority, which would in turn activate its own pressure groups to drum up the required political or authoritative support in order to make things happen.
All kind of tricks have to be tried to make things move. No complaints whatsoever because it's all part of the game.
Question: 2012 will usher in a change in status for IGL being the sole CGD provider in NCT. How do you see this development and what is IGL's plan of action to counter this challenge?
Answer: "We are fully geared up to face the challenge. We have taken steps to secure our business. To this end, we have signed long-term exclusive agreements with various stakeholders in our business."
We are fully geared up to face the challenge. We have taken steps to secure our business. To this end, we have signed long-term exclusive agreements with various stakeholders in our business.
Let's look at it segment by segment. For example, if I talk about CNG business, at present, our major customer is DTC (Delhi Transport Corporation). About 20 per cent of our total sales are with DTC. We have entered into a long-term contract with them, and now for next 10 years, we are going to be the exclusive supplier of CNG for the entire fleet of DTC buses. Another 16 per cent of our sales are committed to oil marketing companies' (OMC) outlets. Again, we are in the final stages of negotiations with various OMCs to strike long-term exclusive agreements. That leaves us with CNG, which is anyways sold by us from our own retail outlets. About 87 per cent of our total sales are contributed by our outlets.
"Only 3 per cent of the total sales are in the domestic PNG segment. And, really speaking, there won't be any competition in domestic PNG segment because it is one of the least paying segments of all. We will welcome competition if at all in this sector."
Only 3 per cent of the total sales are in the domestic PNG segment. And, really speaking, there won't be any competition in domestic PNG segment because it is one of the least paying segments of all. We will welcome competition if at all in this sector.
That leaves us with the industrial and commercial segments. On this front too, we are slowly getting into agreements with the entire cross-section of the players. And whatever gas is available with us, we are making full utilisation of the same. In the last two years, our growth in the industrial segment has been almost 100 per cent year on year.
Question: So are you saying that your business will not be affected at all?
Answer: Yes, we don't foresee any competition at all. As, I mentioned earlier, we have almost secured all our businesses. Theoretically speaking, even if someone wants to market their gas utilising our existing network, they will have to pay IGL network usage charge, which we call network tariff. The network tariff is a reasonable amount and more or less covers our expenses and is a potential source of profit for us. We are allowed to have around 14 per cent return on such arrangements.
My own view is that we have secured our business irrespective of whoever the competitor may be. Competition will not be able to make any kind of dent in our business.
Question: Even though IGL has safeguarded its interest, one cannot rule out at least some ramifications on the CGD business owing to increase in the number of players in the business. What is your take on it?
Answer: New players, who aim to enter the business and make an impact, will have to offer consumers a better deal than what consumers are already receiving from IGL. The deal can be in the form of providing an advantage on the price front or differentiation on any other account in terms of the product or delivery. I'm afraid, new entrants will not be able to match-up to high standards set by IGL on either of these counts. When it comes to pricing and corresponding advantage to customers, we have already build-up minimum margins. Moreover, the quality of service offered by us is no less than any other operator in the market.
I fail to understand how and in what ways new players would compete with us in these areas.
Most importantly, we are able to offer our products at a minimum price. And the reason why we can maintain minimum price for our products is because we enjoy high volumes which pull down our implantation costs by 15 to 20 per cent in comparison to other operators.
Question: How do you view and evaluate the associations struck-up by ONGC (Oil and Natural Gas Corporation Ltd.) and OIL (Oil India Ltd.) with BPCL and IOCL (Indian Oil Corporation Ltd.) for foraying into CGD. Won't these associations make things easier for the new entrants in the CGD business?
Answer: If somebody feels that it is the players such as ONGC, OIL or Reliance that have the gas, then one is mistaken because here the ownership of gas is with the government. RLNG is the only area where ownership is not with the government. Oil Marketing Companies (OMCs) can directly market it. When it comes to CNG there are players such as GAIL, IOCL and BPCL with some more players expected to enter the fray. However, all this is not going to change things for IGL.
"I don't see any advantage in recent tie-ups involving players such as ONGC, IOCL, Reliance or Cairns. These associations do not bring any real advantage on the table. These developments are more about the interest shown by upstream companies to have a taste of downstream business as well by tying-up with downstream players."
As far as we are concerned, our promoters GAIL and BPCL are strong players and thus we feel we are in pretty safe hands when it comes to sourcing gas from R-LNG (regasified LNG) as per our requirement. For other gas, be it ONGC or KG D6 gas, we have as good a right and access to these resources at uniform price as any other player in the field.
These are the reasons why I don't see any advantage in recent tie-ups involving players such as ONGC, IOCL, Reliance or Cairns. These associations do not bring any real advantage on the table. These developments are more about the interest shown by upstream companies to have a taste of downstream business as well by tying-up with downstream players.
Question: IGL has earmarked INR 3,000 crore for its expansion plans focused on Delhi and neigbouring areas including Noida, Greater Noida and Ghaziabad. What are the key plans and strategies being put in place to utilise this money in order to expand and develop CGD in these places?
Answer: We are currently in the first year of our five year expansion plan. We plan to invest about
INR 500 to 600 crore every year to build new infrastructure. This money is meant to be invested within NCR and not in other geographies.
With the kind of investments that we have planned, we are targeting revenue to the tune of
INR 500 crore by March 2016 as against the revenue projection of INR 1,215 crore for March 2012.
We are going equally fast with developmental work in all these targeted areas. As such, we have not set priorities for development work in one area over the other. Simultaneous work and infrastructure development is in progress at high speed in all these areas.
Though initially the pace of work in Noida was bit slow owing to permission hassles, but now things are picking-up. In Delhi, we already enjoy high penetration and are further working towards expanding our reach. The basic network in these areas is being laid.
Question: With a revenue target of INR 1,215 crore by March 2012, what is the growth that you are expecting from different segments, namely CNG, PNG and industrial and commercial in 2011 and next two to three years?
Answer: "Our entire profit is a result of our growth in physical volumes alone. Otherwise margins in the business are very low. In fact, margins for us in absolute terms are not getting any better; we are doing our best to secure our margins as much as we can."
Our entire profit is a result of our growth in physical volumes alone. Otherwise margins in the business are very low. In fact, margins for us in absolute terms are not getting any better; we are doing our best to secure our margins as much as we can.
As far as projections for 2011 are concerned, there will be about 25 per cent growth in our revenues year over year riding high on our volumes. Profit growth will be to the tune of 18 per cent as per the trend.
If one is to give segment by segment account, then CNG is going to see increase in demand with increasingly large number of private cars coming on the road. Some 60,000 CNG run cars hit the road every month. This number is inclusive of CNG fitted cars rolled out by automobile manufacturers as well as the vehicles converting to CNG.
We are expecting 14 to 15 per cent growth year on year from CNG. Domestic PNG will see a growth of 40 to 50 per cent year on year for next two to three years. And industrial and commercial segments will witness 80 to 100 per cent growth year on year for next three to four years.
Question: Do we see enough progress on extensive use of gas in commercial and industrial segments?
Answer: We need to understand that these two segments are also price-sensitive though not as sensitive as household gas.
To promote these segments, one has to ensure that we create incentives for their usage in industries where other fuel such as diesel is being used. Again, to ensure that industries increasingly use gas, it has to be priced reasonably. If LNG is priced high, these industries will not find it attractive to switch over to this fuel. For the industries, keeping their costs low is the main priority, and environment for them comes second.
Question: As per April 2010 data, IGL was operating 185 CNG stations in Delhi and NCT. What are your targets for next couple of months?
Answer: We are moving very aggressively to expand our network. From 181 CNG stations in March 2009 we are all set to end March 2011 with 280 CNG stations. Addition of some 99 CNG stations over just two years is pretty good keeping in mind that it took us 10 years to build those 180 stations. When it comes to PNG, we are close to two lakh connections and every year we plan to add another 50,000 to 60,000 new connections.
Question: In fact as far as PNG connections are concerned, you are ahead of the target set for you by the regulatory body PNGRB?
Answer: On the PNG front, our target is to just provide 35,000 connections every year as per PNGRB directives. On our part, we are geared up to provide as many as 1 lakh connections every year but the trouble is that we do not have the permission to do so. We have the required resources and money to provide more connections to meet Delhites demand for PNG connections. However, it's the regulatory authority's reluctance to provide required sanctions, which is forcing us to restrict ourselves to a conservative estimate of providing only 50,000 to 60,000 PNG connections every year.
Question: Leading up to the Commonwealth Games, IGL was expected to commission 50 new CNG stations to aid mobility in view of the mega sporting event. How does IGL's report card read like on this front? Post CWG, how is the newly created infrastructure and enhanced capacity being utilised?
Answer: "Close to 250 IGL-CNG stations are ready; however, nearly 203 of them are not functioning just because we are awaiting clearances from CCOEN. Just imagine the losses that we are incurring. For nearly 10 months our entire investment to the tune of INR 400 crore is lying unutilised."
Presuming huge increase in CNG demand for the games, we built 60 CNG stations in just one year's time. Unfortunately, problems cropped-up in getting clearances from Chief Controller of Explosives Nagpur (CCOEN). It's been almost 10 months that we have been struggling for the license but we have still not got the required clearances.
Close to 250 IGL-CNG stations are ready; however, nearly 203 of them are not functioning just because we are awaiting clearances from CCOEN. Just imagine the losses that we are incurring. For nearly 10 months our entire investment to the tune of INR 400 crore is lying unutilised.
It is sad to see that even though the required infrastructure is in place to enhance CNG supply to customers, they are still forced to line up in long ques owing to bureaucratic hassles.
Question: Have you raised these issues with regulatory body PNGRB? What is the regulatory body's response to these concerns?
Answer: We have been raising these and other related issues with the regulator PNGRB and the government as well. However, the fact remains that endless delays are continuing in getting the required permissions from concerned authorities and licenses from CCOE. There appears to be a need for deeper engagement on part of the government and the regulator with the CGD companies and the agencies in order that permissions and licences are issued in good time against over many months' period as happening now.
"We need to have a fruitful dialogue between the government - the policy maker and the regulatory body PNGRB - which is responsible for implementing the governmental policies so as to achieve total sync between the two. This will help industry move forward on CGD with full clarity and confidence."
The regulator on its part is aggressively pursuing the rolling out CGD network in more cities, but same attention is not being given to engaging itself in finding out what's ailing the growth of CNG and PNG in areas where it's already operational. We need to examine why people in big cities are not applying for PNG connections. The crux of the story is that we need to look at the cities where CGD business was started five years ago but business is limping in these places.
We need to have a fruitful dialogue between the government - the policy maker and the regulatory body PNGRB - which is responsible for implementing the governmental policies so as to achieve total sync between the two. This will help industry move forward on CGD with full clarity and confidence.
Question: At FICCI, this year, oil secretary, S Sundareshan raised questions over IGL supplying piped gas only to rich people rather than the poor despite the fact that LNF turns out to be cheaper than LPG. How do you react to such criticism?
Answer: If we do a bit of research and debate the issue threadbare, we will realise that city gas as a concept is popular in West because there, out of the total natural gas production, 25 per cent gas is consumed in households and by and large for heating purpose. There is a justified reason for them to invest in CGD.
In India, gas is used only for cooking and this need too basically gets served by LPG cylinder. Also with high cost incurred by operators in providing a single PNG connection, one needs to question whether it's justified to invest in CGD when the gas is being used only for cooking. This also needs to be seen in context of other related hazards such as causing environmental pollution by putting inflammable substance under earth.
The point is that to make CGD successful, one has to promote increased and other alternative use of gas such as running our geysers and air conditioners on gas.
Question: So you agree with Mr. Sundareshan comments that PNG is only reaching out to rich people?
Answer: Well, coming back to your question, the end user turns out to be the rich class. Mr. Sundareshan was perhaps apt in commenting that CGD is reaching out to only rich people.
All said and done, I believe taking CGD to smaller towns and cities is not viable as well.
In a place like Delhi, we are lucky to have a huge load of CNG. And to meet this demand, we have to lay pipelines anyways. This way some of the cost of laying the pipelines is passed on to CNG. Thus, CNG in a way cross-subsidies the cost of domestic PNG. This way, having a CGD network in a city like Delhi is still a viable option compared to smaller towns.
Look at places such as Kanpur, Agra, Lucknow and Indore. How many households in these places have PNG connections?
While talking about PNG connections, there are price issues too. APM gas is priced at $4.2 per kg. Going forward KG D6 gas is also going to be more costly. In next few years, domestic gas price will be $5 to 6 per kg. With soaring gas prices, domestic PNG is also turning out to be pretty expensive and it will not be able to match up LPG in terms of pricing since LPG is highly subsidised.
Given all these factors, we need to relook at the purpose and objective of providing PNG to homes.
Question: So, PNG turns out to be the loss making business?
Answer: Yes, it's one of the least paying segments of all.
We end up spending INR 15,000 to 18,000 per PNG connection. Almost one third of the total amount is paid as digging charges to authorities concerned for just laying the pipelines in a given area. There are other costs involved too when it comes to installing meters in the flats. Of the total money spent on providing a single PNG connection, we only get INR 5,000 as security money from the flat owner. We are nearly losing INR 10,000 per flat, and in the long-term, providing PNG connections within the current set-up will become unsustainable.
There are other issues as well, which are proving to be roadblocks in expanding our PNG network. There are civic authorities, which are asking us to pay road restoration charge for the area where we lay our pipeline. We have suggested undertaking road restoration work ourselves but civic authorities refuse to entertain our demand.
Question: What is the way ahead for addressing the price-related issues plaguing gas supply?
Answer: The thing is that even with increasing prices of LPG, government is unlikely to withdraw the entire INR 300 subsidy applicable for LPG in near future. As far as PNG is concerned, the government has to ensure that the cheap gas is available from domestic resources. Moreover, we cannot expect cheap domestic gas being supplied from R-LNG because from R-LNG, we are getting gas at INR 23 per cubic meter. We sell it at INR 16.85.
Given the high cost of gas, one thing is certain that unless cheaper domestic gas is provided to us, running CGD with accompanying prohibitive cost of laying pipelines for distribution is going to be an unviable proposition in the long run.
Question: Is the government doing enough to address the crisis and challenges being faced by the CGD business?
Answer: "My sense is that the government itself is weighing the pros and cons of providing PNG to homes. I gather this from government and industry led discussions at various formal and informal gatherings."
My sense is that the government itself is weighing the pros and cons of providing PNG to homes. I gather this from government and industry led discussions at various formal and informal gatherings. As far as the choice of CNG as the preferred fuel for city transport is concerned, a second thought of line appears to be evolving owing to the emergence of cleaner and less polluting liquid fuels abiding to EURO IV norms.
Question: With is the apparent confusion within the government over CGD -what is in store for the business in neat future?
Answer: The decision on these crucial issues has to be based on hard facts. It's only through research and numbers that one can convincingly say whether CNG has to be the city transport fuel or not. I myself feel CNG is the fuel for the city transport. These are my personal views and my stand is based on my limited study. Now it's for the industry, researchers and the government to come out with relevant facts and arrive at a firm and sound judgment on the issue at hand.
However, in order to promote CNG, the government in the first place needs to have the conviction that CNG is the cleaner fuel and therefore needs to be fully backed as city transport fuel. It's only strong government conviction, which in turn may result in laws for compulsive use of CNG that would motivate people to take to CNG wholeheartedly.
Owing to lingering doubts and lack of support in terms of pricing, CNG is precariously moving closer to petrol. CNG at INR 40 per kg will find no takers.
"There is a clear need for a strong policy stance on the issue because it's only then that the government will take the required measures, of bringing out laws and allocate cheaper domestic gas to incentivise CNG usage."
We have artificially created more taxes on diesel. However, even CNG will require artificial propping up to make it more attractive to consumers. If people don't see any advantage by adopting CNG, say by way of economy, why would they opt for it?
There is a clear need for a strong policy stance on the issue because it's only then that the government will take the required measures, of bringing out laws and allocate cheaper domestic gas to incentivise CNG usage.
Question: IGL's vision statement urges the organisation to look beyond CNG for transport and PNG for cooking appliances. Over the last couple of years, how and in what ways has IGL gone about accomplishing this task?
Answer: We are soon going to launch a big promotional campaign to promote alternative usage of gas other than cooking alone.
We are going to promote gas-based geysers, water heaters and gas powered generators. For this, we have tied-up with a number of appliance manufacturers. For gas-based power heaters, we are collaborating with companies such as A.O. Smith, Record and Venus. For gensets, we have teamed up with Kohler.
The idea is to promote greater usage of gas and further provide more value to the consumers as gas usage turns out to be cheaper than electricity. And in the process, we will also stand to benefit as same assets will bring more realisation for us.
Also, we are not going to earn a single penny in selling these equipment because we are purely working as a facilitator to promote these gas-based appliances. We will be working towards making these products available to consumers at reasonable prices.