Challenges in Product Pricing in CGD Networks. S K Kudaisya MD, SGL

Transcription

1 Challenges in Product Pricing in CGD Networks S K Kudaisya MD, SGL

2 Environment Internal External Stake Holders Expectations Artificial Prices of Alternate Products Customer Expectations : Cost Benefits with Reliable Service Allocation of Gas APM / Domestic Compliance of PNGRB & Statuary Guidelines Central & State Govts Gas Sourcing,Managing O&M/Services Volatile Exchange Rate & Crude Prices Challenges in Product Pricing

3 Market Driven Prices?? Segment Alternate Fuel Current status of Deregulation CGD Pricing based on procurement of $/MMBTU Petrol Partially Deregulated CNG Diesel Regulated and Highly subsidized Domestic PNG Domestic LPG Regulated and Highly subsidized (50%) 9-11 Commercial PNG Commercial LPG Completely deregulated Industrial PNG Fuel Oil Completely Deregulated 10-18

4 Gas Sourcing a Major Challenge APM / Domestic Gas Allocation Lower priority to CGD sector No allocation to New CGDs Procurement at most competitive rates from External Markets Limited options / aggregate Demand Long Term / Short Term Contracts Take or Pay High Risk to CGD Volatility of Spot Gas Prices

5 Exchange Rate & Crude Prices Exchange Rate Volatility in Exchange Rate - Major Impact on CGDs Rupee depreciated by 20-22% YOY Crude Prices Long Term contracts are formula based in line with Crude prices Short Term Linked with Crude Price with high Premium

6 Central & State Govt. Policies Level Playing?? Central Govt. Custom 5% on RLNG Excise 14.42% on CNG Allocation of APM /Dom Gas No uniform Approach Lower Priority to CGDs Service Tax, recent amendments State Govt. VAT Higher than Alternate 15 % (CNG/Dom) Higher Cost of ROU / ROWs Permissions Multiple Agencies, in lieu of Single Window Clearance No Priority allocation of Land Local Authorities Permissions High Cost & Long Delay HOW TO GET JUSTICE & HAVE LEVEL PLAYING FIELD?

7 Gross Profit Major Factors Affecting Pricing Gas Sourcing pattern Infrastructure Cost Managing Approvals ROU / ROW, NOC etc Mgmt of O&M, Services & Contracts Taxes & Duties

8 Internal Environment Stake Holder Expectation CGD Networks requires huge Capital Investment Return on Investment -?? Operating & Service Cost High for New CGDs Low Penetration, specially on domestic PNG Large GA, with Less Potential - Higher investments Compliance of Statutory / PNGRB Standards / Guidelines Service Tax, recent amendments leading to higher costs Customer Expectation Service Cost Customer expects Cost Benefits compared to Alternate fuels, Less frequent changes in Prices, with High level of services 24x7 continuous un- interrupted Gas supplies

9 Other Challenges. Strike a Balance Trade off between Customer Expectations & Stake holders Competitive Pricing Economic as compared to Alternate Fuel, Affordable to Customers Generates Adequate Revenues for survival of CGDs Comparable to Peer Suppliers pricing in adjoining Markets Manage Pricing Elasticity Strike Balance between Pricing vs Demand to ensure projected Volumes as per BP Contract Risk Management Managing Commercial Contracts i.e. Gas Procurement Contracts with MGO clauses Vs Gas Sales Contracts with / without MGO

10 Pricing influenced by... Taxes / Duties from State / Local / Central Govt Gas Sourcing - imported Long / Short Term / Spot APM Gas Allocation Gas Markets Affordability / Alternate Fuel prices Long Term investments IRR Product Pricing CGD Networks Network Operating Cost Loss / Gain Financial Market - Cost of Funds Business Model / Product Mix Peer Pricing Geo-Political Compulsions

11 Price - Decision Process Set Strategic Pricing Objective (Achieving Target return on Investment / other objectives) Estimate Demand and Price Elasticity (Assessing Value, Implications of Cost Benefit Analysis, Elasticity varies segment wise, switching Cost &Value based Segmentation) Balance RSP, Volumes & Profitability Monitor alternate fuel price & Strategies (Evaluating Competitive Threats) Periodic Review of RSPs Ihr Logo

12 Pricing Approach. Pre-determined Fixed Gross Margin per Unit Targeted Profits by Pre-determined Fixed Return per Unit Determine the Price that would deliver Company s Target rate of Return on Investments (ROCE), say 20% Cost plus Based on Actual Cost attributable to Sales Volumes Determine Costs and charge Traditional industry Margin Works better when Volumes & Actual Costs are accurately known Linked with Alternate Fuel Price linked with Alternate Replacement Fuel Should provide Attractive Pay-back to take care of Conversion Costs / Connection charges etc High Risks to CGD- may result in Lower Margins Peer Comparison Adopting Peer Prices in surrounding Markets Helps win Market Confidence, Customers Good will and create initial Customer base

13 Points to Ponder in Pricing Strategy Price Rise attracts a lot of media attention (and Government). No CGD can be Out of Line on Price for long. Big company leads in Price adjustment. Others Follow. The downward price adjustment similar to upward price adjustment process. Customer Sensitivity Stable prices Trade off between Volume and Margin Short Term Vs Long Term strategy

14 Approach Industrial Customers Option I RSP Lower than Alternate Fuel Option II Uniform RSP at all Locations Option III Segment specific Pricing Option IV Price with MGO Option V Price without MGO at actuals

15 Approach Industrial Customers Best Option RSP Lower than Alternate Fuels, Uniform Price at all locations, without MGO, on Actual Consumption basis Customers are comfortable Helps them plan Growth / Capacity Expansions Growth of Customers / increased Volumes also Business Growth of CGD Leads to Higher Utilization of Assets / infrastructure, creates WIN-WIN situation Generates Lots of Good will for CGD Co in the Markets Offers Small & Medium size industrial Units to Grow with Confidence This would earn Lower Margins, however, would provide Cost Competitive advantage and help industries run thru Rough Phase and tide over the difficult times Ensuring Customers Loyalty over a longer period of time Environment friendly Clean Fuel with Positive impact on Health as compared to traditional Black Oil / Solid Fuel

16 Pricing Domestic Households Economics / Approach Customer perspective Driving factors Growth Gas Pricing linked with Alt Fuel i.e. Domestic LPG on equivalent Heat Value basis Needs to provide incentive to LPG Customers to convert to Gas Absence of APM Gas Allocation makes it non-viable to Supply at price equal to subsidized domestic LPG Present Gas price of Rs/SCM (including Taxes) does not offer any incentive to convert to Gas Subsidized domestic LPG Cylinder (@415 Rs/cylinder) puts a cap and Limits the Market driven Price Revisions Avg Daily consumption varies in range of SCMD Other Fuels Kerosene (20 Rs/Litre), Coal (approx 7 Rs/kg), Wood (4 Rs/kg), Cow-dung etc Hassle free & Convenience freedom from booking refills Initial Connection Charges a high Entry Barrier to PNG Majority Conversions largely from LPG Customers Reliability of Supplies Safer than LPG, secured & un-interrupted Supplies Enjoy Credit Period of Two Months Bi-monthly Billing Satisfaction of using Neat, Clean & Environment friendly Fuel No Margins restricts Growth & limits further Capex Plans

17 Pricing CNG Customers Economics / Approach Customer perspective Driving factors Growth Customers comprise of CNG Cars, Autos, Buses, LCVs etc Replacement of Fuels like Petrol, Auto-LPG etc Cost Economics Attractive with present CNG RSP of 52 Rs/kg, vis-a-vis Petrol (75 Rs/Ltr) & Auto LPG (46 Rs/Ltr) CNG being public utility, Pricing based on Peer Pricing Comparison in surrounding Markets Allocation of APM Gas would help sustain CNG Supplies to Transport sector at Economic & Competitive prices Re-structuring of Govt Taxes & Duties on CNG would help Savings on Petrol - Cost Economics a major driving factor CNG gives Better Mileage as compared to Petrol Attractive Pay-back period on CNG Kit conversion costs Neat, clean & Efficient Fuel Safe fuel with increased Availability Satisfaction of using Environment friendly Fuel Cost Economics of Natural Gas drives Growth in CNG volumes increased Availability generating customer confidence Freedom to charge Market determined RSP

18 Pricing Industrial Customers Economics Replacement of Fuels like Comm LPG (81 Rs/kg), FO (46 Rs/Litre), LDO (52 Rs/Ltr) etc Cost Economics at present Gas prices of Rs/SCM plus Taxes, works Better as compared to Alt Fuels Gas Pricing based on Fixed per unit Gross Margin Customer perspective Driving factors Growth Hassle free & Convenience freedom from Storage / Tankers Pricing affordable and attractive as compared to LPG, FO, LDO Un-interrupted, Smooth & Reliable Supplies on 24 x 7 basis No Spillages, Less Safety Hazards, enhanced Life of Eqpts Enjoy Credit Period of days Supplies No Hassles from Pollution Control Boards Satisfaction of using Neat, Clean & Environment friendly Fuel Customer gets improved end-product Quality Cost Economics of Natural Gas provides for Savings Savings re-invested in Business help Customers Growth Gas Supplier earns Fixed Return per unit CGD Co s Growth depends on Gas Sourcing, which plays vital Role in Selling Price & Customers Gas Consumption

19 Pricing Commercial Customers Economics / Approach Customer perspective Driving factors Growth Avg Daily consumption varies in range of SCMD Alternate Replacement Fuels like Comm LPG (81 Rs/kg), FO (45 Rs/Litre), Coal (approx 7 Rs/kg), Wood (4 Rs/kg) etc Cost Economics works Better with present Gas prices of 37 Rs/SCM plus Taxes Gas Pricing linked with Alt Fuel i.e. Comm LPG on equivalent Heat Value basis Environment friendly Clean Fuel with Positive impact on Health as compared to traditional Black Oil / Solid Fuel Hassle free & Convenience freedom from booking refills Pricing affordable and attractive as compared to LPG & FO Reliability of Supplies Safer than LPG, secured & un-interrupted Supplies Enjoy Credit Period of days Supplies Consume Now and Pay Later, on receipt of Bill Confidence & Satisfaction Using Neat, Clean & Environment friendly Fuel Cost Economics of Natural Gas provides for Savings Savings help Customers Growth in Business Gas Supplier earns good margins

20 Thank You