Rating Rationale

Detailed rationale

CRISIL Ratings has placed its rating on the long-term bank facilities of Gujarat Gas Limited (GGL) on 'Rating Watch with Developing Implications'.

The rating action follows the recent announcement by the company on the scheme of amalgamation announced by the parent companies of GGL – Gujarat State Petroleum Corporation (GSPC) and Gujarat State Petronet Limited (GSPL). As per the announcement, GSPC and GSPL are to be merged into GGL. However, the gas transmission business will subsequently be carved out and listed as a separate entity, GSPL Transmission Limited (GTL), which will not be a part of GGL, post successful completion of the scheme of arrangement. The scheme has been approved by the board of the respective companies and is awaiting requisite regulatory and other approvals and could take 3-4 quarters for completion.

CRISIL Ratings notes that GSPC, which undertakes natural gas trading business, is the country’s second largest gas trading company and has healthy financial profile with nil debt since fiscal 2023. However, CRISIL Ratings is yet to fully assess its credit profile and the potential impact of its merger with GGL, as some of the critical information related to GSPC’s business is awaited. Timely receipt of the required information as well clarity on other important business and financial parameters will be important for resolution of the rating watch.

Furthermore, CRISIL Ratings understands that there is a high likelihood of successful completion of the scheme of amalgamation given the potential synergy benefits and valuation gains for the shareholders. However, further developments on the merger process will be monitorable. Till the completion of the merger process, all the three entities are likely to operate as per current arrangements, without any material impact on existing operations.

The rating by CRISIL Ratings on the bank facilities of GGL continues to reflect strong financial risk profile, backed by healthy cash accrual and negligible reliance on external debt. The rating also derives comfort from the company's sizeable scale of operations as the largest city gas distribution (CGD) entity in India. These rating strengths are however partially offset by its exposure to volatility in re-gasified liquefied natural gas (R-LNG) and domestic natural gas prices, risk related to setting up CGD networks in the newer geographical areas (GAs) in a timely and cost-efficient manner and exposure to regulatory risks.

Operating performance of GGL continues to remain healthy. For fiscal 2024, the volume grew 12% on-year to around 9.35 million metric standard cubic metres per day (mmscmd), led by PNG-industrial and CNG segments. However, revenue remained flat on account of lower realisations, in-line with the fall in gas prices. The profitability remained healthy, supported by high volume and ability of the company to pass on fluctuations in input costs.

GGL is expected to incur annual capital expenditure (capex) of Rs 1,000-1,200 crore over the medium term, to be largely funded through internal accrual. The company continues to remain net debt free since March 31, 2023, supported by healthy annual accrual.