Rating Rationale
September 30, 2020 | Mumbai
Bharat Gas Resources Limited
Long-term rating continues on 'Watch Developing'; short-term rating reaffirmed 
 
Rating Action
Total Bank Loan Facilities Rated Rs.2000 Crore
Long Term Rating CRISIL AA+ (Continues on 'Rating Watch with Developing Implications')
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL's rating on the long-term bank facilities of Bharat Gas Resources Limited (BGRL) continues to be on 'Rating Watch with Developing Implications'; the short-term rating has been reaffirmed at 'CRISIL A1+'.
 
CRISIL had placed its rating on the company's long-term bank facilities on watch following a similar rating action on BGRL's immediate parent, Bharat Petroleum Corporation Ltd (BPCL; 'CRISIL AAA/Watch Developing/CRISIL A1+'), post-receipt of approval from the cabinet committee on economic affairs for the divestment of the Government of India's entire shareholding in BPCL, along with the transfer of management control, to a strategic buyer. CRISIL will reassess the linkages between BPCL and BGRL to take appropriate rating action after a buyer for the government stake in BPCL is identified and the transaction structure is finalised.
 
The ratings continue to reflect the strong managerial, operational, and financial support BGRL receives from BPCL, driven by the strategic importance of the company to the parent's vision and strategy to develop the natural gas business. The standalone business risk profile is expected to remain healthy, backed by the transfer of the existing gas trading business of BPCL to, and building up of the city gas distribution (CGD) business in, BGRL. The CGD business is expected to have a regulation-driven market exclusivity in the allocated geographical areas, favourable regulations relating to allocation of low-cost administered pricing mechanism (APM) gas as an input for the CNG and domestic piped natural gas (PNG) business, and flexibility in pricing of products. The ratings also factor in healthy financial flexibility because of transfer of stakes of BPCL in the gas-based businesses to BGRL.
 
These strengths are partially offset by continued exposure to project risks as the company has won 13 new geographical areas (GAs), will oversee implementation of four GAs to be transferred from BPCL, and plans to bid for new CGD projects over the medium term. Furthermore, it is susceptible to changes in government regulations for the natural gas industry.
 
In fiscal 2021, the pace of project execution is expected to be impacted by Covid-19. Work has commenced in most GAs, albeit at a slower pace. Extension of timelines may not be considered as delays against the minimum work programme (MWP), given the unforeseen nature of the pandemic. Nevertheless, the Covid-19 situation is evolving rapidly and remains a monitorable.

Analytical Approach

CRISIL has applied its parent notch-up framework to factor in the extent of support from BPCL, from which BGRL receives operational, financial, and managerial support. Furthermore, BPCL's strategic importance to the government and expectation of continued support from it also benefit BGRL, considering its criticality to BPCL. The rating approach may undergo a change based on the outcome of the divestment process.

Key Rating Drivers & Detailed Description
Strengths:
* Healthy managerial, operational and financial support from BPCL
As a part of its vision and strategy to focus on the natural gas business, BPCL is transferring its entire gas business, including gas trading and gas-related investments, to its wholly owned subsidiary, BGRL. The company (BGRL) would be able to focus on the development and efficiency of the entire gas operations and hence, will be critical for BPCL. Key management personnel (marketing and finance) will also be deputed by BPCL. Moreover, four out of the seven directors on BGRL's board (including BPCL's chairman) are expected to be common over the medium term.
 
BPCL's 100% ownership in BGRL and its strategic importance underscores the moral obligation to provide timely and need-based support. Any deviation from this understanding shall be a rating sensitivity factor.
 
* Healthy expected business risk profile, driven by transfer of existing gas trading business of BPCL and development of the CGD business
BGRL's gas trading business would comprise the bulk gas trading of more than 1.8 million tonne per annum currently being done by BPCL. Business risk profile is expected to be comfortable as around half of this supply is for BPCL's own consumption in its refineries, while the remaining is majorly secured through long-term contracts with RasGas Company Ltd and Mobil Australia.
 
BGRL will be the sole distributor of CNG in the 17 CGD projects bagged in the Petroleum and Natural Gas Regulatory Board (PNGRB) auction. As part of the agreements, the company will have marketing exclusivity in the projects for 5-8 years from the date of their respective authorisation. It will also have network exclusivity for 25 years.
 
The CGD operations are expected to benefit from the favourable regulations by PNGRB on the allocation of 100% APM gas as an input. The CGD companies are given highest priority for allocation. This helps them meet almost all their CNG and domestic PNG requirements through APM gas, which is priced lower than imported liquefied natural gas (LNG). Also, effective from November 1, 2014, PNGRB has been regulating prices for the domestically produced natural gas.
 
* Financial flexibility from equity investments in gas-based businesses
As a part of the reorganisation plan, BGRL will also get BPCL's equity stakes in gas-related investments, such as 12.5% stake in Petronet LNG Ltd (rated 'CRISIL CCR AAA/Stable'), 22.5% equity stake in Indraprashtha Gas Ltd, and 22.5% stake in Maharashtra Natural Gas Ltd ('CRISIL AA-/Stable/CRISIL A1+'). These investments are expected to provide healthy financial flexibility and a regular source of dividend over the medium term.
 
Weaknesses:
* Exposure to project risk in the CGD business
The company is implementing 17 GAs bagged in the PNGRB auction, entailing a capital expenditure (capex) of more than Rs 4,000 crore. The capex is expected to be funded in a debt-equity ratio of 80:20. Implementation risks include obtaining approvals from local and state government bodies for laying pipeline grids and setting up dispensing centres; delays in obtaining approvals could defer the project. Hence, the company will remain exposed to project implementation risk over the medium term. Moreover, it faces funding risk as finance will have to be tied up for incremental capex. Also, the project returns are contingent on shift in demand from existing fuels for transport, domestic, and industrial purposes to natural gas, and thus a key sensitivity.
 
* Susceptibility to changes in government regulations
Regulation of natural gas, including CGD, is still at the initial stage in India and hence, there is some uncertainty regarding the regulatory norms for natural gas allocation and distribution. Though the uncertainty in regulations is expected to subside as the industry matures, any unexpected change in regulations regarding allocation of natural gas and pricing of the end-product can adversely impact CGD players such as BGRL.
Liquidity Strong

BPCL will be transferring its entire gas business to its wholly owned subsidiary, BGRL. The company will be availing of long-term loans for financing capex for the 17 GAs it will be implementing. CRISIL believes BPCL will support BGRL for financing the equity portion of the capex. Over the medium term, BGRL's debt servicing will be through the acquired business and need-based support from BPCL. As on date, BGRL has not drawn down any debt, and thus does not have any debt obligation.

Rating sensitivity factors:
Upward factors
* Commissioning of a substantial portion of the 17 GAs being implemented in the CGD business and scale-up of operations with returns in line with anticipation. Additionally, performance of the existing gas trading business being in line with expectations
 
Dowward factors
* Any large, debt-funded capex weakening financial risk profile
* One notch downgrade in BPCL's rating to result in a corresponding downgrade in BGRL's rating
* Change in ownership at BPCL leading to change in ownership of, or support philosophy to, BGRL.

About the Company

BGRL, a wholly owned subsidiary of BPCL, was incorporated on June 7, 2018. Under this company, BPCL's gas business has the potential to grow independently and attain better operational and sector efficiency. The entire gas business of BPCL is to be transferred to BGRL including gas trading, gas-related investments, and related agreements including assets and liabilities (largely in the form of joint ventures), and current and future CGD-related businesses.

Key Financial Indicators
As on / for the period ended March 31 Unit 2020 2019**
Revenue Rs crore 273 NA
Profit after tax (PAT) Rs crore 2 NA
Adjusted debt/adjusted networth Times NA NA
PAT margin % 0.6 NA
Interest coverage Times NA NA
* - Company incorporated in June 2018
**The financial accounts for March 2019 has been made. However, pending business transfer and since the company is in project stage, the figures are minor

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size
(Rs crore)		 Complexity Level Rating assigned
with outlook
NA Proposed long term bank loan facility NA NA NA 400 NA CRISIL AA+/Watch Developing
NA Proposed working capital facility NA NA NA 500 NA CRISIL A1+
NA Bank guarantee* NA NA NA 313 NA CRISIL AA+/Watch Developing
NA Proposed Non Fund based limits^ NA NA NA 787 NA CRISIL AA+/Watch Developing
* PBG (performance bank guarantee) is issued through Yes Bank and Bank of Baroda for the above-mentioned amounts for submission to PNGRB under CGD Bidding Round 9 process; and through ICICI Bank for the above-mentioned amounts for submission to PNGRB under CGD Bidding Round 10 process and other CGD operations
^ Non-fund facility is required for submission of bank guarantee/standby letter of credit (SBLC) to LNG suppliers/exporters as well as transporters, submission of bid bonds, PBG to PNGRB during the course of business
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  900.00  CRISIL AA+/(Watch) Developing/ CRISIL A1+/(Watch) Developing  19-08-20  CRISIL AA+/Watch Developing/ CRISIL A1+  06-12-19  CRISIL AA+/Watch Developing/ CRISIL A1+  27-12-18  CRISIL AA+/Stable    --  -- 
        21-05-20  CRISIL AA+/Watch Developing/ CRISIL A1+  29-11-19  CRISIL AA+/Watch Developing/ CRISIL A1+           
        26-02-20  CRISIL AA+/Watch Developing/ CRISIL A1+  18-01-19  CRISIL AA+/Stable/ CRISIL A1+           
Non Fund-based Bank Facilities  LT/ST  1100.00  CRISIL AA+/(Watch) Developing  19-08-20  CRISIL AA+/Watch Developing  06-12-19  CRISIL AA+/Watch Developing  27-12-18  CRISIL AA+/Stable    --  -- 
        21-05-20  CRISIL AA+/Watch Developing  29-11-19  CRISIL AA+/Watch Developing           
        26-02-20  CRISIL AA+/Watch Developing  18-01-19  CRISIL AA+/Stable           
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
Bank Guarantee* 313 CRISIL AA+/Watch Developing Bank Guarantee* 302 CRISIL AA+/Watch Developing
Proposed Long Term Bank Loan Facility 400 CRISIL AA+/Watch Developing Proposed Long Term Bank Loan Facility^ 725 CRISIL AA+/Watch Developing
Proposed Non Fund based limits^ 787 CRISIL AA+/Watch Developing Proposed Non Fund based limits^ 473 CRISIL AA+/Watch Developing
Proposed Working Capital Facility 500 CRISIL A1+ Proposed Working Capital Facility 500 CRISIL A1+
Total 2000 -- Total 2000 --
* PBG (performance bank guarantee) is issued through Yes Bank and Bank of Baroda for the above-mentioned amounts for submission to PNGRB under CGD Bidding Round 9 process; and through ICICI Bank for the above-mentioned amounts for submission to PNGRB under CGD Bidding Round 10 process and other CGD operations
^ Non-fund facility is required for submission of bank guarantee/standby letter of credit (SBLC) to LNG suppliers/exporters as well as transporters, submission of bid bonds, PBG to PNGRB during the course of business
Links to related criteria
CRISILs Approach to Financial Ratios
Rating Criteria for Upstream Oil and Gas Sector
CRISILs Bank Loan Ratings
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support
The Rating Process
Understanding CRISILs Ratings and Rating Scales

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