Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities and debt instruments of Great Eastern Energy Corporation Limited (GEECL) to ‘CRISIL A-/Stable’ from 'CRISIL BBB+/Positive'

The rating upgrade reflects improved credit risk profile as reflected in healthy operational and financial performance in Q4FY23 backed by growth in its cash accruals on account of significant hike in off-take pricing with customers.

In November, 2022, GEECL renewed its sale agreement with its key customer Steel Authority of India Ltd. (SAIL) at a significant higher price, benefited by steep increase in global natural gas prices, though the minimum guarantee offtake (MGO) in SAIL’s contract has been reduced. However, GEECL has been able to negotiate better MGO terms with other customers and has been able to largely sell the reduced volumes from SAIL contract to its other customers, thereby mitigating demand risk. Further, the revised contract with SAIL provides healthy revenue visibility for near to medium term along with new contracts getting renewed at competitive prices due to healthy demand of gas in its catchment area.

GEECL’s financial risk profile has been improving and shall benefit from adequate cash accruals and minimum capex plans. Leverage measured as debt to equity has been comfortable at around 0.50 times as of March 2023 and it is expected to remain below 1 time over the medium term. With improvement in EBITDA to Rs 44 crores in fourth quarter of fiscal 2023 on account of revision in contracts, GEECL’s interest coverage improved to 4.7 in fourth quarter of fiscal 2023 and is expected to remain above 5x times over the medium term.

Sales volume which grew by 4% on a y-o-y basis in fiscal 2022, remained however muted during fiscal 2023. The growth was restricted due to a natural decline in output from the existing 156 wells drilled along with higher production related operational losses during second half of fiscal 2023 due to stabilization issue at customers end due to change in volume requirements. While the operational losses normalized by March end, the company is in the process of undertaking an efficiency capital expenditure (capex) to address this decline, benefits of which is expected to reflect from fiscal 2025 onwards. The improvement in the production and thereby sales volumes would remain a key monitorable.

Business risk profile continues to remain healthy, driven by its commercially operational Raniganj block with original gas in-place (OGIP) of 10.62 trillion cubic feet, its integrated infrastructure, MGOs with customers and pricing freedom which ensures certain revenue visibility as well as profitability over the medium term.

The above-mentioned rating strengths are however partially offset by the regional and end-user industry concentration risks, stagnant volumes as well as moderate, though improving, financial risk profile of the company.

Key Rating Drivers & Detailed Description

Strengths:

Commercially operational Raniganj block with proven gas reserves and integrated infrastructure

GEECL is the pioneer of coal-bed methane (CBM) in India and was the first company to commercially produce CBM in 2007. Its primary operational asset is a 210 square kilometer (sq. km) block in Raniganj (South) in West Bengal's Asansol-Raniganj-Durgapur industrial belt. GEECL has a 100% participating interest in the block until 2036 with a possible extension of 5 years. It has laid a dedicated pipeline of around 116 kilometers for distribution of gas to its customers.

Long-term sale agreements with SAIL, and MGO contracts executed with customers mitigates volume risk; supported by improved off-take pricing

The company has renewed its long-term sale agreements with SAIL's IISCO steel plant in Asansol and Kulti with significant hike in price, but with reduced MGO of 0.12 mmscmd. GEECL has been able to renegotiate better pricing terms with other customers as well. The hike in contract prices has provided sufficient revenue visibility.

Further, MGO contracts are executed with other customers, for contract terms varying between 1 to 3 years. During the current renewal, GEECL has also been able to increase the MGO volumes with these customers. This would further help mitigate the volume risk on account of reduction in SAIL’s MGO, to a large extent. SAIL accounted for majority of GEECL's sales volume in fiscal 2022 and fiscal 2023. However, the offtake of balance SAIL’s MGO volume of gas from other customers will remain a key monitorable.

Weaknesses:

Moderate, albeit improving financial risk profile

Financial risk profile, while improving, continues to remain moderate. Interest coverage ratio has improved to 3.32 times in fiscal 2023, from 2.55 times in the previous year and is expected to  improve further to above 5x times in fiscal 2024. Net cash accruals to adjusted debt ratio has increased   to 0.21 times in fiscal 2023 from 0.16 times in the previous year, and it is expected to improve to around 0.4x times in fiscal 2024. The financial risk profile is expected to improve going forward, with improvement in off-take pricing from SAIL resulting in better realization and expected ramp-up in sale volumes. The company budgets to incur an efficiency capex of around Rs 100 crore over the next two years, to be mainly funded through internal accruals.

Exposed to customer concentration risk

GEECL’s customer base is mainly concentrated towards the steel industry players, with around 70% off-take confined to SAIL alone in fiscal 2022. Though the concentration to SAIL has come down to around 61% in fourth quarter of fiscal 2023, however the other major customers continue to be from steel industry exposing GEECL’s performance to the market trend of the steel industry. Going froward, access to GAIL’s Jagdishpur-Haldia-Bokaro-Dhamra pipeline could provide the company an access to newer markets, thereby minimizing this risk and providing a further support in terms of ramping up the gas sales volume.

Annexure - Details of Instrument(s)

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