By Mahaveer Jain

India Ratings and Research (Ind-Ra) has affirmed Gujarat Gas Limited’s (GGL) Long-Term Issuer Rating at ‘IND AA’. The Outlook is Stable. In addition, the agency has assigned GGL’s IND20bn bank loan limits an ‘IND AA’ rating. A full list of rating actions is provided at the end of this commentary.

KEY RATING DRIVERS

Positive Structural Changes: GGL’s renegotiation of the natural gas purchase pricing benchmark under a long-term contract has substantially improved its competitive ability. The contract provides for a change in the pricing benchmark to the three-month Brent price from the previous five-year average. GGL has a substantial portion of its procurement under long-term contracts, thereby benefiting from margin expansion and reduced competitive intensity. This could improve operating cash flow resiliency in future.

Strong Financial Profile: The ratings take into account GGL’s strong financial profile, supported by sustained positive cash flow from operations. In FY16, GGL’s EBITDA gross interest cover was 2.9x (FY15: 3.3x) and net leverage (adjusted net debt/EBITDA) was 3.2x (FY15: 1.9x).  Furthermore, EBITDA gross interest coverage improved to 4x in 1HFY17. The agency expects GGL to maintain the current level of EBITDA margin, leading to continued positive operating cash flow and strong credit metrics in the next 12-18 months.

Scale and Exclusive Coverage: The ratings reflect GGL’s strong operating profile. The company benefits from economies of scale, diversified customer and supplier bases, and near-monopolistic nature of business. It has over 17,120km of pipeline infrastructure, 233 CNG stations and over 1.1m domestic customers, with capacity exceeding 5.5m square cubic meter per day. The city gas distribution sector benefits from high entry barriers due to exclusivity in coverage and large upfront capex. Moreover, GGL received approval to operate in six new areas in 1HFY17.

Linkage with Parent: The ratings factor in the standalone business and financial profile of GGL. The agency does not expect GGL to extend any support to the parent, Gujarat State Petroleum Corporation Limited (GSPC), or any group entities.

Cyclicality and Competition from Alternative Fuel: GGL’s rating is constrained by its heavy reliance on imported liquefied natural gas to meet the requirements of industrial customers. GGL undertakes a part of its procurement on a spot basis. Therefore, material input price volatility, along with significant rupee weakening, could have a magnified impact on operating cash flows due to high price elasticity of demand (as it concerns industrial customers). High exposure to industrial customers and competition from alternative fuels introduces cyclicality in demand.

In FY16, GGL’s margins declined due to a slowdown in the end-user industry and competition from alternate fuels. Fuel oil and coal were available at huge discounts, leading to a fall in sales volume. Industrial customers account for the majority of GGL’s revenue.


Capex Risks:
The ratings are constrained by significant capex (INR4bn-INR5bn annually) planned for at least the next three years. GGL intends to incur capex on the maintenance and expansion of existing assets, and entry into new geographies. GGL incurred a capex of INR5.8bn in FY16 (FY15: INR3.6bn).


RATING SENSITIVITIES

Positive: Higher domestic gas allocation, cheaper LNG and increased sales contribution from domestic customers leading to an improved and stable operating margin on a sustained basis or a sustained reduction in net leverage could lead to a positive rating action.

Negative:
 A sustained fall in operating margin and or an unexpected debt-led capex leading to a sustained increase in net leverage could lead to a negative rating action. Also, any adverse regulatory development could lead to a negative rating action.


COMPANY PROFILE

GGL has been formed by the amalgamation of GSPC Gas Company Ltd (GSPC Gas), Gujarat Gas Company Ltd, Gujarat Gas Financial Services Ltd and Gujarat Gas Trading Company Ltd with GSPC Distribution Networks Ltd (later renamed GGL). GGL is the largest city gas distributor in India. GGL registered INR61bn in revenue for FY16 (FY15: INR90bn). Moreover, it had an EBITDA margin of 11.9% (12.3%) in FY16.

GGL’s Ratings
- Long-Term Issuer Rating: affirmed at ‘IND AA’/Stable
- INR350m commercial paper/short-term debt (carve-out of fund-based working capital limits): affirmed at ‘IND A1+’
- INR12bn working capital limits: affirmed at ‘IND AA’/Stable/‘IND A1+’
- INR20bn bank loan limits: assigned ‘IND AA’/Stable/‘IND A1+’



SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings.

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

DISCLAIMER

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Mahaveer Jain

    Associate Director
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001768

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121