Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable’ rating on the bank facilities of IndianOil Adani Gas Private Limited (IOAGPL).

 

Further, CRISIL Ratings has withdrawn its rating on bank guarantee Rs. 122.62 crore on receipt of withdrawal request and requisite documents. The withdrawal is in line with CRISIL Ratings’ rating withdrawal policy.

 

The rating continues to reflect moderate though improving business risk profile of the company, with exclusivity rights for nineteen Geographical Areas (GAs) awarded up to 10th city gas distribution (CGD) bidding round. The marketing exclusivity rights are granted by PNGRB for a term of eight years (five years till the 8th bidding round) while the network exclusivity rights are granted for twenty-five years.

 

IOAGPL has almost achieved the minimum work programme (MWP) targets for the nine GAs awarded up to 8th round. For remaining ten GAs awarded in 9th and 10th round, company has received extensions from PNGRB where work is still to be completed. More specifically, the company has received ~42 months’ time extension for five newer GAs due to absence of the required gas trunk pipeline. In addition, for the balance five GAs, extension of ~24 months have been sanctioned since the execution was impacted mainly owing to the Covid-19 pandemic.

 

The company is currently on track in achieving its MWP targets with regards to setting up compressed natural gas (CNG) stations and laying out the required pipeline connectivity. Majority of the new GAs are in proximity to the existing operational GAs, thus giving an advantage in terms of implementing the CGD network

 

There has also been an improvement in operating performance during fiscal 2023, with ramp up of volumes both from the existing as well as new GAs. IOAGPL set up around 60+ CNG stations in fiscal 2023. Low operating margins for fiscal 23 was primarily on account of bulk natural gas sales (which are purely opportunistic volumes at lower per scm margins) . Excluding the bulk natural gas sales, the gross profits per scm improved for fiscal 23, indicating the ability of the company to pass on the rise in input gas prices. Also, medium term business prospects continue to remain comfortable, with further ramp up expected in volumes and improving operating leverage accruing from increased scale of operations.

 

Financial flexibility of the company remains comfortable. The company had earlier sought term loans to fund existing 9 GAs; the repayment tenure of which were elongated by 6 years. Accordingly, cash flow availability to for the company improved which could be used to fund capex and thereby reduce incremental debt. With improving net cash accruals and interest coverage ratio, the financial median also improved for the company. The trend is expected to continue over the medium term.

 

The rating continues to take comfort from the strong managerial, operational, and financial support extended by Indian Oil Corporation Ltd. (IOCL; ‘CRISIL AAA/Stable/CRISIL A1+’) that is identified as the critical parent for IOAGPL. The company however continues to receive continued financial support from both its promoters, IOCL and Adani Total Gas Ltd (ATGL); extended in the ratio of their equity shareholding in the company. The performance bank guarantees (PBGs) rated is also supported by a corporate guarantee extended by the promoters, in the ratio of their equity shareholding in the company.

 

These strengths are however partially offset by the continued project risk of the company in terms of timely and cost-efficiently implementing the CGD network in the ten new GAs, its modest financial risk profile and susceptibility of operating performance to changes in government regulations for the natural gas industry.

Analytical Approach

For analysis, CRISIL Ratings has notched up the standalone business and financial risk profile of IOAGPL for the parental support extended by IOCL (identified as the critical parent).

Key Rating Drivers & Detailed Description

Strengths:

• Healthy managerial, operational, and financial support from the promoters

IOAGPL is a joint venture (JV) of IOCL and ATGL, which have a healthy business and financial risk profile, and strong operational and technical experience. The JV partners have appointed three directors from IOCL, two from ATGL and one director is appointed from Total SA. The company continues to benefit from gaining access to IOCL’s retail outlets on commercial terms. IOAGPL also benefits from IOCL’s 12.5% equity stake in, and 30% marketing rights for natural gas in the re-gasified liquefied natural gas (RLNG) terminals of Petronet LNG Ltd at Dahej and Kochi, which is made available to the company at commercial terms. ATGL also lends its managerial and technical expertise, backed by experience in operating CGD projects. Through Total SA (which owns a 37.4% stake in ATGL through its subsidiary - Total Holdings SAS), IOAGPL is expected to benefit in terms of LNG sourcing at competitive rates. The JV also benefits from the promoters’ ability to tie-up debt at competitive rates, when needed. In addition, the promoters have already provided a 50:50 corporate guarantee to support the PBGs.

 

• Regulation-driven market monopoly for the GAs won

IOAGPL is the sole distributor of CNG and piped natural gas (PNG) in the CGD projects bagged in the PNGRB auction. As per PNGRB regulations, marketing exclusivity rights are granted by PNGRB for a term of eight years (five years till the 8th bidding round) while the network exclusivity rights are granted for twenty-five years. Even with the exclusivity rights ending for seven GAs, no new players are expected considering the high entry barriers. IOAGPL is, therefore, well-positioned to tap the expected growth in the gas sector in these regions. Further, the National Green Tribunal has been issuing orders to the industries operating in certain polluting industrial clusters (where IOAGPL is currently laying its pipeline), to switch to alternate cleaner fuels such as PNG. This is expected to boost the gas sale volumes of the company.

 

• Sustained operating performance

Operating performance improved in fiscal 2023, mainly contributed by ramp up in volumes both from the existing as well as the new GAs. Gas volume sales improved to 386 million metric standard cubic meters (mmscm) in fiscal 2023 as compared to 206 mmscm in fiscal 2022. IOAGPL set up around 60+ CNG stations in fiscal 2023 and is on track to add more than 100 CNG stations this fiscal which would further boost its volumes. Also, the required pipeline connectivity in the new GAs is being laid which will enable activating domestic and industrial PNG connections over the medium term.

 

Blended EBITDA/scm declined to Rs. 5.41 /scm in fiscal 2023 (Blended EBIDTA/scm excluding bulk sales – Rs. 6.65) as compared to Rs. 6.81 /scm in fiscal 2022. This was mainly on account of margins being impacted owing to bulk natural gas sales that fetch lower margins undertaken by the company. Hence although total revenue for the company improved, overall operating margins shrunk during fiscal 23.

 

IOAGPL is expected to timely and cost-efficiently continue to expand its CGD network in the allotted GAs, which would be a key rating monitorable.

 

Weaknesses:

• Continued exposure to project risks

The company had won 10 geographies in the 9th and 10th rounds of bidding, wherein the required infrastructure is to be set up within a timeframe of eight years. The company has received ~42 months’ time extension for five newer GAs due to absence of the required gas trunk pipeline. In addition, for the balance five GAs, extension of ~24 months have been sanctioned since the execution was impacted mainly owing to the Covid-19 pandemic. While the company is currently on track in achieving its MWP targets with regards to setting up compressed natural gas (CNG) stations and laying out the required pipeline connectivity, since significant proportion of work is still to be completed, timely and cost-efficiently implementing the CGD network in the awarded new GAs would continue to be a key rating monitorable.

 

• Moderate risk in gas availability

As per the Government directives that were announced in 2014, CGD companies were to be given a priority in terms of allocation of the cheaper domestic gas; for CNG and domestic PNG sales. However, considering the pace at which the CGD industry is expected to grow its volumes, domestic administrative price mechanism (APM) gas may not be sufficient to meet its entire requirements and hence the companies would increasingly have to resort to the costlier non-APM domestic gas/imported R-LNG to suffice its supply requirements. While IOAGPL has been able to pass on a maximum increase of the price hikes to its end consumers as alternate fuels are priced even higher, its sustainability will be a key monitorable as it would be a key determinant in enabling the company to maintain its operating profitability.

Liquidity: Strong

Annual cash accruals are expected to remain sufficient, to meet the near-term debt repayment obligations of the company. The company had earlier sought term loans to fund existing 9 GAs; the repayment tenure of which were elongated by 6 years. Accordingly, cash flow availability to for the company improved which could be used to fund capex and thereby reduce incremental debt. Required funding for the new GAs have been tied up, to be undertaken through a mix of equity infusion and additional debt borrowings. 

Outlook: Stable

CRISIL Ratings expects steady improvement in the operating performance, backed by healthy volume growth and stable realisations and a gradual moderation in project risk.

Rating Sensitivity factors

Upward factors

• Achievement of MWP targets before schedule
• Healthy operating performance combined with prudent capex undertaken, improving the debt/EBITDA to below 4x times

 

Downward factors

• Significant delays in undertaking project execution for the GAs won
• Weakened operating margin deteriorating interest coverage to below 1.60 times
• Change in support philosophy or downgrade in IOCL’s rating by at least one notch

About the Company

IOAGPL, a 50:50 JV between IOCL and ATGL, was incorporated in October 2013, to engage in the business of carrying out CGD across various geographies in India.

 

While the company was awarded to set up CGD networks in nine GAs up to the 8th bidding round, it further has won the authorisation of setting up networks in ten new GAs, awarded during the 9th and 10th bidding round.

Any other information: Not applicable

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	Bank Guarantee	NA	NA	NA	6944.30	NA	CRISIL A+/Stable
NA	Bank Guarantee	NA	NA	NA	122.62	NA	Withdrawn