Rating Rationale
May 30, 2019 | Mumbai
Gujarat Gas Limited
Rating outlook revised to 'Positive', rating reaffirmed
Rating Action
Total Bank Loan Facilities Rated Rs.2350 Crore
Long Term Rating CRISIL AA/Positive (Outlook revised from 'Stable' and rating reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the long-term bank facilities of Gujarat Gas Limited (GGL) to 'Positive' from 'Stable', and reaffirmed the rating at 'CRISIL AA'.

The revision in outlook reflects CRISIL's expectation that GGL's business risk profile may improve if its profitability, financial risk profile and liquidity are sustained over the near term.

GGL is expected to clock healthy growth in volumes driven by commercialisation of new geographical areas (GAs) along with the National Green Tribunal (NGT)'s order of banning the use of coal gasifiers in Morbi (Gujarat) region over the medium term. The NGT order has led to migration of industrial customers, mainly ceramic tile manufacturers, to piped natural gas from coal. From the Morbi industrial belt, GGL has achieved peak volumes of over 4.5 million metric standard cubic meter per day (mmscmd) during April 2019, compared to an average 2.5 mmscmd earlier. Sustenance of volume growth and profitability in the industrial segment is a key monitorable.

Further, GGL is expected to incur annual capital expenditure (capex) of Rs 500-600 crore over the medium term.

The rating reflects the company's sizeable scale of operations as the largest city gas distribution (CGD) entity in India, healthy financial risk profile and stable profitability. These strengths are partially offset by exposure to volatility in re-gasified liquefied natural gas (R-LNG) and domestic natural gas prices and exposure to regulatory risks.

Analytical Approach

CRISIL has combined the business and financial risk profiles of GGL and its subsidiaries/associates to arrive at the ratings.

Please refer Annexure - List of entities consolidated, for details of the entities considered and their analytical treatment for consolidation.

Key Rating Drivers & Detailed Description
Largest CGD player in India with diversified customer profile
GGL's strong and established market position in the CGD industry in India is indicated by its industry-leading presence in 23 districts across Gujarat, Dadra and Nagar Haveli, and Maharashtra. It has also won bids for six new GAs during the 10th CGD bidding round, covering Rajasthan, Haryana, Punjab and Madhya Pradesh. New GAs should help attain geographical diversification while expanding the scale of operations. The company's user base comprised around 13.55 lakh domestic households, 3540 industrial units, and 344 CNG stations, as on March 31, 2019, providing strong revenue diversity. Its total daily gas sale was 6.53 mmscmd in fiscal 2019. GGL's total gas volume is expected to grow 25-30% during fiscal 2020 following the ban on coal gasifiers in the Morbi region.
* Healthy financial risk profile
Financial risk profile is driven by healthy cash accrual, comfortable debt protection metrics, and adequate liquidity. Cash accrual increased to Rs 623 crore during fiscal 2019 from Rs 515 crore in fiscal 2018. The interest coverage ratio has also augmented to 5.59 times from 4.6 times, while gearing improved to 1.18 times as on March 31, 2019 from 1.49 times a year ago. Debt protections metrics could witness significant enhancement in fiscal 2020 with the upside in sales volumes.
* Profits remain healthy despite volatility in RLNG and domestic gas prices
The domestic gas prices rose 19% during fiscal 2019, while the spot RLNG increased 10%. Despite this hike, the company was able to pass on the increased cost to its customers, and maintain a healthy gross profit per standard cubic metre (scm)

During fiscal 2019, the total sales volumes increased to 6.53 mmscmd, compared to 6.22 mmscmd the previous fiscal. The company generated an earnings before interest tax depreciation and amortisation (EBITDA) of Rs 984 crore on revenues of Rs 7,754 crore during fiscal 2019, as compared to Rs 914 crore on Rs 6,175 crore, respectively, the previous fiscal.
The ban on coal gasifiers in Morbi region, which is one of the biggest industrial markets for GGL, could further increase the sales realisation of the company, following the regulatory push for cleaner fuels.
* Exposure to regulatory risks and volatility in RLNG prices
Regulation of natural gas, including CGD, is still in the initial stage in India and hence, there is considerable uncertainty regarding the regulatory norms for natural gas allocation and distribution. Though the uncertainty in regulation is expected to subside as the industry attains maturity, any unexpected change in regulations regarding allocation of natural gas and pricing of end-product can adversely impact CGD players like GGL.

Liquidity is strong with cash and bank balance of Rs 313 crore as on March 31, 2019. Net cash accrual, healthy at Rs 623 crore during fiscal 2019, is expected to improve further with increase in volumes should comfortably meet debt repayment of Rs 124 crore during fiscal 2020. Expected capex of Rs 500-600 crore should be met through a prudent funding mix of debt and internal accruals. Liquidity is further supported by largely unutilised working capital bank lines. 

Outlook: Positive

CRISIL believes higher operating profits due to ramp-up in volumes may strengthen the business risk profile, and lead to an improvement in the debt protection metrics.

Upside scenario
* Significant growth in volumes while maintaining healthy gross margins
* Sustained improvement in the financial risk profile, backed by growth in accruals

Downside scenario
* Sizeable decline in operating performance, or deterioration in capital structure on account of higher-than-expected debt-funded capex.

About the Company

GGL is India's largest natural gas distribution company, with operations concentrated in Gujarat. It was formed by the amalgamation of GSPC Gas Company Ltd, Gujarat Gas Company Ltd, Gujarat Gas Financial Services Ltd, and Gujarat Gas Trading Company Ltd with GSPC Distribution Networks Ltd. GGL has presence in 23 districts in Gujarat, Dadra and Nagar Haveli, and Maharashtra.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 7754 6175
Profit After Tax (PAT) Rs crore 418 292
PAT Margin % 5.3 4.7
Adjusted debt/adjusted networth Times 1.18 1.49
Interest Coverage Times 5.58 4.60

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs.Cr) Rating assigned with outlook
NA Term Loan NA NA Dec-27 516 CRISIL AA/Positive
NA Term Loan NA NA Sep-27 1599 CRISIL AA/Positive
NA Term Loan NA NA Mar-29 100 CRISIL AA/Positive
NA Proposed Term Loan NA NA NA 135 CRISIL AA/Positive
Annexure - List of Entities Consolidated 
Names of entities consolidated Extent of consolidation Rationale for consolidation
Gujarat gas limited employees welfare stock option trust Fully consolidated Sole beneficiary
Gujarat info. Petro limited Equity method Related business and common promoters
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
--  CCR    --    --    --    --  22-11-16  Withdrawal  CCR AA/Stable 
Fund-based Bank Facilities  LT/ST  2350.00  CRISIL AA/Positive      23-02-18  CRISIL AA/Stable      30-11-16  CRISIL AA/Stable  CRISIL AA/Stable 
                    22-11-16  CRISIL AA/Stable   
Non Fund-based Bank Facilities  LT/ST    --    --    --    --  22-11-16  CRISIL AA/Stable/ CRISIL A1+  CRISIL AA/Stable/ CRISIL A1+ 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Proposed Term Loan 135 CRISIL AA/Positive Proposed Term Loan 72 CRISIL AA/Stable
Term Loan 2215 CRISIL AA/Positive Term Loan 2278 CRISIL AA/Stable
Total 2350 -- Total 2350 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation

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