RATING RATIONALE 6 Aug 2020 State Petroleum Corporation Ltd.

Brickwork Ratings assigns ratings for the Bank Loan Facilities aggregating Rs.7500.00 Crs of Gujarat State Petroleum Corporation Ltd. (GSPC)

Particulars Amount Rating* (₹ Crs) Tenure Facilities/ Instrument** Previous Previous Present Present (----)

Fund Based – Term - 1448.42 Loan BWR AA- FB – Corporate TL 951.56 Long - (Stable) Term 1085.02 Assigned FB – ECB (US$ 144.74 mn) Fund Based – CC - 1015.00^ ​ Non-Fund Based – Short BWR A1+ - 3000.00^ - LC/BG ​ Term Assigned

INR Seven Thousand and Five Total - 7500.00 Hundred Crores Only *Please refer to BWR website www.brickworkratings.com/ for the definition of the ratings ​ ​ ** Details of Bank Loan facilities are provided in Annexures-I ^ Includes​ unallocated CC facilities of Rs.265.00 Crs and LC/BG facilities of Rs.675 Crs.

RATING ACTION / OUTLOOK The rating assigned, inter alia, factors in strong parentage with the (GoG) owning 86.89% (directly and indirectly through GoG entities), significant improvement in gas trading volumes to 17.48 MMSCMD (million metric standard cubic meter per day) during FY20, GSPC being one of the largest gas trading companies in India , presence across the value chain in the energy sector through its subsidiaries, advanced stage of moving out of certain loss-making exploration and production (E&P) assets. The rating also factors in a substantial debt reduction due to the debt realignment plan wherein GoG infused equity of Rs.6000.00 Crs through GSIL (rated BWR AA(SO) (Stable), conversion of compulsory convertible debentures (CCDs) of Rs.550.00 Crs as of FY20 and through repayment, which resulted in positive net-worth and lower debt during FY19 and FY20, and improved operational and financial performance along with key credit metrics. As per Brickwork Ratings (BWR) estimates, revenues for the current year are expected to be similar to the audited financials for FY20, although volumes have slightly reduced during Q1 FY21 on account of weak demand due to the lockdown during April-May 2020. The company is expected to improve its gas trading volumes going forward during the rest of FY21.

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The rating also factors in the experienced management of GSPC and its strategic importance for the state, continuous support in the form of equity infusion. Earlier, its net-worth was impacted and turned negative due to the one-time impairment/write-offs of Rs.14923.55 Crs of its E&P assets. Now its net-worth has turned positive post the debt realignment and equity infusion from the GoG. Furthermore, its investment in subsidiaries/ associate companies such as Gujarat State Petronet, Gujarat Gas, Sabarmati Gas, GPPC and GESG have steadily growing revenue streams and financials on a consolidated basis have shown improvement. Overall debt levels reduced to Rs.10585.47 Crs as of FY20 (Consolidated) from Rs.20914.01 Crs as of FY18 and improved its Debt/EBITDA to 2.19x as of FY20 from 5.88x as of FY18. Furthermore, GSPC has adequate debt service coverage indicators and has generated adequate cash accruals as against yearly debt repayment.

However, the rating is constrained by its ability to improve gas trading volumes, given the current scenario of low price and demand, maintaining its operating margins, exiting from its remaining 21 E&P assets wherein no further impairment/cost is expected, its moderate capital structure impacted due to the impairment of E&P assets, risk associated with the price fluctuation in its trading business and currency risk on account of ECB exposure that exposes the company to currency fluctuation and foreign exchange volatility. Lower-than-anticipated demand, which has resulted in lower volumes during Q1 FY21 is also expected to increase the volatility of revenue and margin for the company. Furthermore, the regulation of natural gas, including city gas distribution, is still in the initial stage in India, and hence, there is considerable uncertainty regarding the regulatory norms for natural gas allocation and distribution.

The outlook for the company remained Stable, considering the increased gas trading volumes, moderated EBITDA margins, substantial debt reduction in high-cost debt as of FY20 and being left with low wt. average cost of debt and improved liquidity profile, profitability and cash accruals generation as against its debt repayments. However, trading volumes are expected to remain at moderate levels during FY21 due to the low demand scenario on account of the current lockdown of industrial and commercial establishments due to COVID-19 during Q1 FY21, dependency on GoG towards funding support which has reduced significantly over the years, and the current regulatory environment. The company’s ability to improve revenues and profitability and improve its capital structure, given the current scenario, for the oil and gas sector remain key rating sensitivities.

KEY RATING DRIVERS

Credit Strengths: Continuous improvement in scale of operations: GSPC’s gas trading portfolio grew steadily over the years from 2.63 MMSCMD in FY06 to 13.09 MMSCMD in FY19 and increased by 33.54% to 17.48 MMSCMD in FY20. Its improvement in the operating performance during FY20 was mainly due to an increase in gas trading volumes sold and improved margin levels. However, it reduced to 15.18 MMSCMD as of Q1 FY21 due to the Covid-19 pandemic. Revenues mainly increased due to an increase in trading volumes (including increased sales in Gujarat Gas), and the sale of electricity (GSEG and GPPC). Furthermore, the low gas price scenario is expected to further increase demand mainly from power generation and fertiliser companies. Going forward, this is expected to continue during FY21 and thus volumes are expected to increase.

Parent support and liquidity position: GoG owns 93.48% equity in the company directly and ​ through State Government entities and GSPC has been receiving timely support from the state government in terms of equity infusion and funding support. The company is generating adequate

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cash accruals to fund its debt repayment and interest servicing. Furthermore, the company is in advanced stage of moving out of certain loss-making E&P assets, which had impacted its financials and capital structure in the past. The company is professionally managed and supported by a team experienced in the energy sector.

This can also be seen from a substantial debt reduction due to the debt realignment plan wherein the MCA has approved the scheme of arrangement between GSPC, Gujarat State Investment Ltd. (GSIL) (Rated BWR AA (SO) (Stable) in November 19) and GSPC NCD holders vide an order dated 25 April 2019 for equity infusion in exchange of the transfer of an obligation of Rs.6000.00 Crs NCD by GSPC to GSIL with effect from 1 April 2018. Accordingly, the total equity increased from Rs.257.93 Crs as of FY19 to Rs.1075.64 Crs as of FY20 after the consideration of Rs.6000.00 Crs of NCDs settled in equity and conversion of Rs.550.00 Crs of CCDs in equity. Furthermore, the company was reimbursed Rs.430.58 Crs in FY20 towards interest payments serviced by the company on the transferred NCD (April 2018-December 2018) on behalf of GSIL, in the interim period prior to completion of the transfer process. With the debt realignment plan and the infusion from GoG, it was able to reduce its total debt from to Rs.23438.88 Crs as of FY17 to Rs.6013.48 Crs as of FY20 (Standalone).

Improved financial risk profile: On a Consolidated basis, operating revenues increased to Rs.21303.09 Crs in FY20 from Rs.19114.27 Crs in FY19. Generated cash accruals of Rs.3118.68 Crs as of FY20 as against the debt repayment of Rs.1868.85 Crs during FY21. Total debt reduced to Rs.10585.47 Crs as of FY20, with a Net-worth of ​ Rs.3617.41 Crs and DE ratio of 2.93x. On a standalone basis, operating revenues increased to Rs.15232.37 Crs in FY20 from Rs.14368.58 Crs in FY19. Generated cash accruals of Rs.503.65 Crs as of FY20 as against a debt repayment of Rs.451.31 Crs during FY21. Total debt reduced to Rs.6013.48 Crs as of FY20, with a tangible net-worth of Rs.839.42 Crs and DE ratio of 7.16x. Of the total investments of Rs.3928.29 Crs, Rs.2633.65 Crs are quoted investments (Gujarat State Petronet Ltd.) and have a market value of Rs.3928.29 Crs (as of FY20). The remaining Rs.1405.53 Crs are unquoted investments in subsidiary companies in energy business and associates and joint ventures (GPPC, GSEG, GSPL India Gasnet, Sabarmati Gas and GSPL India Transco).

Presence across value chain in energy sector: GSPC, along with its subsidiaries/JVs and affiliates, is an integrated energy company with presence across the entire value chain, including gas marketing, oil & gas exploration, development and production, developing liquefied natural gas (LNG) terminals, gas transmission, city gas distribution and power generation. It has been engaged in the gas marketing business since 2004 and is the second largest gas marketing company in India. The company sources gas and supplies to customers in a number of industries, such as power generation, fertilisers and city gas distribution. GSPC also supplies gas to its group companies/subsidiaries/associates engaged in these businesses. The company has entered medium-term/long term gas purchase agreements to procure gas while a certain portion of the gas procurement is met through spot LNG /R-LNG purchases.

Financial flexibility: GSPC’s financial flexibility remained high and can be derived from the availability of the competitive pricing funds to the company. Furthermore, GSFS has provided long-term funds of Rs.2550.00 Crs at a very competitive pricing, which reduces its dependency on high-cost short-term funds to meet its fund requirements.

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Growth prospects and outlook of gas trading business: As per PNGRB, India’s share in the gas sector is aimed to be at 15.00% of the overall energy sector by 2030 from the current level of 6.2%. It is expected to help grow the country’s gas consumption to 115 bcm (billion cubic meters) by 2020 with a CAGR of 7.20%. Furthermore, Gujarat accounts for ~32.00% of the total gas consumption in India, wherein almost ~84.00% of its area is covered under the city gas distribution network (CGD). Of the total demand of gas consumption built-up in Gujarat 146 MMSCMD for FY20 (Prov.), 101 MMSCMD was produced domestically/ supplied and balance 45 MMSCMD was imported, of which GSPC’s share stood at 12.87%.

Credit Risks:

High debt coverage indicators and weak capital structure: Despite a reduction in its debt due to realignment and capital infusion, its debt to equity ratio remained high at 7.16x on a standalone basis as its net-worth was eroded due to the one-time impairment of Rs.14,923.55 Crs during FY17. However, on a consolidated basis, it improved to 2.93x as of FY20. Furthermore, the DSCR remained at 1.35x and 1.57x as of FY20, on a standalone and consolidated basis, respectively.

High dependency on imports: The company is highly dependent on imports for gas, which poses ​ inherent price fluctuation risk associated with the international gas prices. Furthermore, it is exposed to the foreign exchange risk on account of ECBs. However, this is covered though natural hedge from its gas trading business.

Portfolio of E&P business and write-offs: During FY17, the company incurred a loss of Rs.16,303.19 Crs on account of the impairment of the E&P assets worth of Rs.14,923.55 Crs towards the value of the PI in KG Block. It had a PI in ~60 blocks, of which 11 were overseas blocks. Over the years, the company exited from its loss-making assets and now, it has reduced its PI to 21 blocks as of FY20. During FY20, it has accounted for Rs.551.98 Crs of impairment due to the sharp fall in oil prices during the current year. BWR expects no further deterioration on the E&P asset profile. Going forward; the company is focusing more on the gas marketing business.

ANALYTICAL APPROACH AND APPLICABLE RATING CRITERIA For arriving at its ratings, BWR has applied its rating methodology as detailed in the Rating Criteria below (hyperlinks provided at the end of this rationale). BWR has taken a consolidated view on the company’s operational and financial performance, promoter’s contribution, substantial debt reduction, current gas trading volumes, its presence across the energy value chain, and the reduction in E&P assets while arriving at the rating.

RATING SENSITIVITIES Going forward, the focus on the gas trading business and tapping the market available in India and especially in Gujarat, ensuring adequate volumes of gas trading activities and maintaining moderate EBITDA margins while reducing its debt position will be key monitorables and sensitivities for the company.

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Positive: The outlook may be revised to Positive if the gas trading volumes improve substantially, ​ along with an improvement in EBITDA margins, and there is a substantial improvement in the company’s financial profile and debt servicing metrics.

Negative: The outlook may be revised to Negative if the company fails to reduce its E&P assets at ​ an optimum level, there is a further significant impairment of its E&P assets, low revenues are generated from gas trading volumes, and there is no improvement in debt coverage metrics.

LIQUIDITY: Strong The company’s (on a consolidated basis) cash and cash equivalents were at Rs.1486.22 Crs as of FY20 , and the unutilised amount of CC facilities were at Rs.750.00 Crs as of June 2020, along with a short-term loan of Rs.275.00 Crs from banks and Rs.450.00 Crs GSFS. The company’s liquidity remains strong with Rs.3118.68 Crs cash accruals generated during FY20, as against the debt repayment of Rs.1868.85 Crs during FY21.

COMPANY PROFILE Incorporated in 1979, Gujarat State Petroleum Corporation Ltd. (GSPC) trades in gas and is also engaged in the exploration and production of oil and natural gas. GSPC, a government of Gujarat undertaking (93.48% directly and indirectly), pursues projects across the value chain in the energy sector. The GoG owned 86.89% (20.83% directly and 72% through GSIL (Gujarat State Investment Ltd.)) of the equity capital as of FY20 and Gujarat State Financial Service Ltd. (GSFS) held 6.59% shareholding as of FY20. GSPC, along with its subsidiaries/JVs and affiliates, is an integrated energy company with presence across the entire value chain, including marketing, oil & gas exploration, development and production, developing liquefied natural gas (LNG) terminals, gas transmission, city gas distribution and power generation.

GSPC has been engaged in the gas marketing business since 2004 and is India’s second-largest gas marketing company. The company sources gas and supplies to customers in a number of industries such as power generation, fertilisers and city gas distribution. GSPC also supplies gas to its group companies/subsidiaries/associates engaged in these businesses. The company has entered medium-term gas purchase agreements to procure its gas while a certain portion of the gas procurement is met through spot LNG /R-LNG purchases. GSPC’s gas trading portfolio grew steadily over years from 2.63 MMSCMD in FY06 to 13.09 in FY19 and 17.48 MMSCMD in FY20.

As on 31 March 2020, GSPC has participating interests (“PI”) in 21 domestic blocks, out of which, 19 are producing assets and 1 block each is in the development and exploration stage. In FY 2016-17, the company divested its 80% PI in KG Basin block- KG-OSN-2001/3 (‘KG Block’) to ONGC. The company continues to hold 10% PI in the KG Block. The E&P business accounts for crude oil sales of more than 500 barrels per day of crude oil and natural gas sales of more than 52,700 standard cubic meter per day.

KEY FINANCIAL INDICATORS (in INR Crs) On a Consolidated basis, operating revenues increased to Rs.21303.09 Crs in FY20 from Rs.19114.27 Crs in FY19. EBITDA improved to Rs.4840.59 Crs in FY20 from Rs.4137.60 Crs in FY19. A PAT of Rs.2322.24 Crs in FY20 was generated from Rs.1618.22 Crs in FY19. Generated cash accruals of Rs.3118.68 Crs were noted as of FY20, as against debt repayment of Rs.1868.85 Crs during FY21. Total debt reduced to Rs.10585.47 Crs as of FY20 with the tangible net-worth of Rs.3617.41 Crs and DE ratio of 2.93x. www.brickworkratings.com Page 5 of 9 ​ ​ ​

On a standalone basis, operating revenues increased to Rs.15232.37 Crs in FY20 from Rs.14368.58 Crs in FY19. EBITDA improved to Rs.1564.66 Crs in FY20 from Rs.1171.45 Crs in FY19. Generated PAT of Rs.366.38 Crs in FY20 from Rs.259.51 Crs in FY19. Generated cash accruals of Rs.503.65 Crs as of FY20, as against debt repayment of Rs.451.31 Crs during FY21. Total debt reduced to Rs.6013.48 Crs as of FY20 with a tangible net-worth of Rs.839.42 Crs and DE ratio of 7.16x.

FINANCIAL INDICATORS – ISSUER (Standalone) Key Parameters Units FY19 FY20 Result Type Audited Audited Operating Income Rs. Crs 14368.58 15232.37 EBITDA Rs. Crs 1171.45 1564.66 PAT Rs. Crs 259.51 366.38 Tangible Net-worth Rs. Crs 672.63 839.42 D: E Ratio Times 10.12 7.16 Current Ratio Times 1.41 1.51

FINANCIAL INDICATORS – ISSUER (Consolidated) Key Parameters Units FY19 FY20 Result Type Audited Audited Operating Income Rs. Crs 19114.27 21303.09 EBITDA Rs. Crs 4137.60 4840.59 PAT Rs. Crs 1618.22 2322.24 Tangible Net-worth Rs. Crs 1164.86 3617.41 D: E Ratio Times 10.68 2.93 Current Ratio Times 0.76 0.79

KEY COVENANTS OF THE INSTRUMENT/FACILITY RATED The terms of the sanction of loans from all banks and financial institutions include standard covenants normally stipulated for such facilities by banks/FIs. The Rupee term loan, and ECB and WC facilities ​ from banks have the first pari-passu charge over the Company’s share of (10%) receivables in the contract area (KG-OSN-2001/3), receivable from JODPL, and Corporate TL is secured by first pari-passu charge over 8.71% holding in GPPC and 32.60% holding in GSEG and 22.50% shareholding in Sabarmati Gas. Most of the term loans have a tenor of ~7-9 years, payable quarterly instalments with interest rates ranging from 7.00%-8.80%.

COOPERATION WITH PREVIOUS RATING AGENCY IF ANY: NA

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RATING HISTORY FOR THE PREVIOUS THREE YEARS [including withdrawal ​ ​ and suspended]:

S. No. Instrument Current Rating Rating History

Type 2019 2018 2017 (Long Amount NCD/ Bank Term/ Outstanding Rating Loan Date Short (₹ Crs) Rating Rating Date Rating Date Rating Term) Date BWR AA- Long 1. FB - TL 1448.42 (Stable) NA NA NA NA NA NA Term Assigned BWR AA- FB – Corp. Long 2. 951.56 (Stable) NA NA NA NA NA NA TL Term Assigned 1085.02 BWR AA- Long 3. FB – ECB (US$144.74 (Stable) NA NA NA NA NA NA Term mn) Assigned BWR AA- Long 4. FB – CC 1015.00^ (Stable) NA NA NA NA NA NA Term Assigned NFB – Short BWR A1+ 4. 3000.00^ NA NA NA NA NA NA LC/BG Term Assigned

Total 7500.00 INR Seven Thousand and Five Hundred Crores Only

^ Includes unallocated CC facilities of Rs.265.00 Crs and LC/BG facilities of Rs.675 Crs.

COMPLEXITY LEVELS OF THE INSTRUMENTS

For more information, visit www.brickworkratings.com/download/ComplexityLevels.pdf ​ Hyperlink/Reference to applicable Criteria General Criteria ​ ● Approach to Financial Ratios

● Infrastructure Sector

●

Analytical Contacts Investor Contacts

Vipula Sharma Director - Ratings Liena Thakur B :+91 80 4040 9940 Assistant Vice President - Corporate Communications [email protected] +91 84339 94686 [email protected]

Mukesh Mahor Senior Manager - Ratings B :+91 80 4040 9940 Ext :333 [email protected]

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Gujarat State Petroleum Corporation Ltd. (GSPC)

ANNEXURE I th Details of Bank Loan Facilities rated by BWR (As on 27 ​ July 2020) ​ Sl. Name of Type of Long Term Short Term Total No. the Bank Facilities (₹ Cr) (₹ Cr) (₹ Cr) Term Loan Corporate CC LC/BG (O/s) TL SBI (Lead 1. Bank Loan 985.54 951.56 300.00 1450.00 3687.10 Bank) Syndicate 2. Bank Loan 65.88 - - - 65.88 Bank 3. PNB Bank Loan 65.88 - 75.00 - 140.88 Allahabad 4. Bank Loan 43.54 - - - 43.54 Bank Bank of 5. Bank Loan 43.54 - - - 43.54 6. UCO Bank Bank Loan 43.54 - - - 43.54

7. Corp. Bank Bank Loan 43.54 - - - 43.54

8. Andhra Bank Bank Loan 43.54 - - - 43.54

9. Dena Bank Bank Loan 34.94 - - - 34.94 Punjab & 10. Bank Loan 34.94 - - - 34.94 Sind Bank 11. BOB Bank Loan - - 300.00 625.00 925.00 Union Bank 12. Bank Loan 43.54 - 75.00 250.00 368.54 of India Unallocated Bank Loan - - 265.00 675.00 940.00

TOTAL 6414.98 ^ Includes unallocated CC facilities of Rs.265.00 Crs and LC/BG facilities of Rs.675 Crs.

th Details of ECB rated by BWR (As on 4 ​ July 2020) ​ th ECB - US$ mn Sanctioned O/s O/s Mar'19 O/s 4 ​ July 2020 ​ (US$ mn) US $ mn (Rs. Crs) (Rs. Crs) BOB-London 100.00 4.19 84.38 62.76 -Singapore 50.00 0.00 0.00 0.00 BOI - New York 50.00 8.37 42.19 31.42 EXIM Bank 75.00 18.57 128.45 139.30 BOB-London 50.00 12.16 84.11 91.21 UBI - Hong Kong 25.00 6.08 42.05 45.61 Allahabad Bank - Hong Kong 25.00 6.08 42.06 45.61 Syndicate Bank - London 50.00 12.16 84.11 91.21 BOI - Jersey 100.00 24.31 168.15 182.32

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SBI - Nassau 100.00 28.58 197.69 213.80 EXIM Bank 100.00 24.24 167.67 181.78

Total 725.00 144.74 1040.86 1085.02

Total (Bank Loan and ECB) INR Seven Thousand and Five Hundred Crores only.

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