AMRITPUR

Mr. Walkar, the Regional Head (Gas) was in a dilemma. His company Hind Urja Ltd., is a leading player in
hydrocarbon based energy industry in India. There were 4 well established players in Gaseous fuel
marketing in India, and in past 3 years, 4 new entrants have entered the market. Large Gas finds in the
KG Basin has made the Indian market attractive to tap for next 25 years for gaseous fuels.
As on 2012, Hind Urja had an All India market share of 21% of gas fuel market. But it had a dominant
position in select cities of India in LPG (Liquefied Petroleum Gas). There are 4 major user segments for
LPG (i) Households, (ii) Transport (Auto LPG), (iii) Commercial (Restaurants, Eateries, Hotels and
Bakeries) and (iv) Industrial.
Amritpur, one of the key Industrial cities in India was an important market for Hind Urjas Gas business.
Hind Urja has a 40% market share in Amritpur market Gaseous fuels. The other key players in Amritpur
Gas Fuel market and their market share are shown below.
Market Size (tons per day) in each segment and the market shares of each player by segment
(As on November 2012)
Company HH (Sold In
Cylinders)-
Tons/day
Transport
(Auto LPG)
Tons/day
Commercial
(sold in
cylinders)
Tons/day
Industrial
(Bullets)
Tons/day
Total (Tons
per day)
Market
share in
Amritpur
market (%)
Hind Urja 150 0 30 20 200 40%
Ind Gas 50 15 30 20 115 23%
Bha Oil 100 0 15 0 115 23%
Real Gas 0 0 0 20 20 4%
Yes Gas 0 0 0 15 15 3%
BG 0 0 0 15 15 3%
ON Gas 0 0 0 10 10 2%
Shell 0 0 0 10 10 2%
Total
Tons/day
300 15 75 110 500 100%

The Imminent Entry of Piped Natural Gas
After the latest gas finds in the KG Basin, Indian Government has decided to set up Gas grids in select
cities across the country Amritpur being one of them. To avoid duplication of investment in gas
pipelines, Government has planned to invest and provide gas pipelines till the door step of the
consumer with the internal piping to be paid for by individual consumer.
Economics of Piped Natural Gas (PNG)
Piped Gas provides tremendous cost savings all along the distribution chain and reduces cost to end
consumer by 50%. A comparative cost chart of distributing and consuming LPG and PNG are shown in
the following table
Cost Head LPG (Rs. / Kg) PNG (Rs. / Kg)
Cost of Production Rs. 110 Rs. 45
Cost of Bottling / Pressurising Gas for transmission + Cost of
Transport
Rs. 5 Rs. 1
Distributor Margin Rs. 4 Nil
Pilferage / Loss in Transit Rs. 1 Nil
Profit to Company -20* 4
Cost to Consumer 100 50
Estimated One time Investment by Hind Urja for Amritpur PNG
Operation
Nil Rs. 15 Crores

*These are weighted figures as LPG is sold at different prices to different segments. HH get at a
subsidised price, while Commercial and Industrial segments get at non subsidised rates.
A quick survey among Amritpurs HH, Commercial and Industrial fuel users indicated that about 75% of
users will convert to PNG if it is introduced at 50% price of LPG and these 75% were willing to pay an
upfront amount of Rs.10,000/= per connection for laying the PNG pipeline till their kitchen/oven/kiln
(point of consumption of fuel). This upfront amount will defray the cost of installation and laying pipes
from street level to customer usage point on a No Profit/No Loss basis. The table in the next page shows
the revenue projections for next 5 years.
If the decision to invest in Amritpurs PNG is taken now, it will take 12 months to get the pipelines laid to
distribute PNG, and hence the PNG operations can commence from 2014.
The Head of Finance has submitted the following P&L and Cash flow statement for Hind Urjas Amritpur
Gas Fuel Business taking into account the growth of population, industrial activity and possible
conversion from LPG and other fuels to PNG, once it is introduced. (see next page)

All figures
(In Rs. Cr)
Current
Situation
2012
2013 2014 2015 2016 2017 2018
LPG Sales (a) 184.4 193.6 101.6 85.4 70.1 53.1 34.3
PNG Sales (b) 0 0 64.9 89.2 114.9 152.1 197.0
Revenue
from Gas
Fuels (a) + (b)
184.4 193.6 166.6 174.6 185 205.3 231.2
Expenses for
gas fuels
202.3 212.4 171.3 175.7 181.8 196.4 216
Profit before -17.9 -18.8 -4.7 -1.1 3.3 8.8 15.3
interest ,
depreciation
and tax
Depreciation 0 0 3 3 3 3 3
Profit before
Tax
-17.9 -18.8 -7.7 -4.1 0.3 5.8 12.3
Investment
into PNG
equipments
0 15 0 0 0 0 0
Net cash
flow from
operations
-17.9 -33.3 -4.7 -1.1 3.3 8.8 15.3
Cumulative
cash flow
-17.9 -51.2 -55.9 -57.0 -53.7 -44.9 -29.6

Market Whispers:
1. the market rumours indicated that Real gas and Ind gas have decided to become aggressive in
Amritpur market.
2. real gas plans to buy out BG, ON Gas and Shell operations in Amritpur by March 2013, with a
non complete arrangement for next 20 years.
3. Ind gas has found a cartel arrangement with Bha oil, where in from 2013 onwards Bha oil will
focus on HH, Transport and commercial segments and Ind Gas will focus only on industrial
sector in Amritpur.
4. LPG subsidies given to HH segment will be withdrawn by April 2013. HH segment will market
determined process for LPG from April 2013.
Questions:
1. If you were Mr. Walker would you recommend to HU to enter Amritpur PNG business? why?
2. What should be your strategy (as Mr. Walker) if projections and market whispers were to be
true.
You may use only data given in the case study. if you make any assumptions for any of the calculations
please label them as assumptions and specify them clearly.
Amritpur if all Gas operations were to be looked at together.
All figures
(In Rs. Cr)
Current
Situation
2012
2013 2014 2015 2016 2017 2018
LPG Sales (a) 465.1 488.3 264.3 224.8 191.1 153.5 117.7
PNG Sales (b) 0 0 188.7 258.7 328.1 423.3 536.6
Revenue
from Gas
465.1 488.3 453.0 483.4 519.2 576.8 648.3
Fuels (a) + (b)
Expenses for
gas fuels
481.6 505.6 445.4 468.5 494.7 540.2 597.7
Profit before
interest ,
depreciation
and tax
-16.5 -17.3 7.6 14.9 24.5 36.6 50.6
Depreciation 0 25.0 25.0 25.0 25.0 25.0 0
Profit before
Tax
-16.5 -42.3 -17.4 -10.1 -0.5 11.1 50.6
Investment
into PNG
equipments
0 125.0 0 0 0 0 0
Net cash
flow from
operations
-16.5 -142.3 7.6 14.9 24.5 36.6 50.6