Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank facilities of Maharashtra Natural Gas Limited (MNGL).

 

The ratings continue to reflect a monopoly in supply of CNG and PNG in Pune, Maharashtra. The ratings also factor in healthy operating efficiency, supported by favourable regulations relating to allocation of low-cost administered pricing mechanism (APM) gas as an input for the CNG and the domestic PNG business, and full flexibility in pricing of products. Furthermore, managerial and technical support is received from the promoters, GAIL India Ltd, Bharat Petroleum Corporation Ltd (BPCL; rated 'CRISIL AAA/Watch Developing/CRISIL A1+'), and Indraprastha Gas Ltd (IGL). These strengths are partially offset by exposure to debt-funded capex plans and project-related risks, and susceptibility to adverse changes in government regulations for CGD, with respect to pricing and allocation of natural gas.

 

MNGL has received authorisation for setting up CGD networks in three new GAs under the Round 9 bid conducted by the Petroleum and Natural Gas Regulatory Board (PNGRB). Capex of about Rs 3,480 crore is expected on these new GAs over the medium term. The financial risk profile is expected to remain comfortable despite the capex, due to healthy cash accruals and the modular nature of capex. CRISIL Ratings believes that the company will prudently fund the capex along with maintaining an overall healthy capital structure. Any material change in the capital structure would be a key rating sensitivity factor.

Analytical Approach

CRISIL Ratings has taken a standalone view of the credit profile of MNGL.

Key Rating Drivers & Detailed Description

Strengths:

• Monopoly in supply of CNG and PNG in Pune, including Pimpri-Chinchwad

The company is the sole distributor of CNG and PNG in Pune (including Pimpri-Chinchwad and adjoining contiguous areas of Hinjewadi, Chakan, and Talegaon). It has been granted exclusivity of 25 years (since 2009) for infrastructure creation, including laying down of pipelines and CNG distribution outlets. Also, despite the end of the five years marketing exclusivity in April 2014, no new competitors emerged in this segment as competitors of CNG marketing will have to pay compression charges and network tariff to MNGL for using its pipeline network, thereby reducing the financial attractiveness of the project. Thus, the company is expected to remain the sole player in the region and is well-placed for growth in the gas distribution sector.

 

The company has also received authorisations for setting up CGD networks in three new geographies as part of bidding Round 9 of PNGRB; these are Ramanagara in Karnataka; Valsad (except areas already authorised) Dhule and Nashik, and Sindhudurg district, Maharashtra. On factoring the extensions permitted by PNGRB for the execution delays caused due to the pandemic, MNGL would have a marketing exclusivity right upto 2026 and network exclusivity rights of upto 2043 for the new GAs.

 

• Healthy operating efficiency supported by favourable regulatory developments

Operations have benefited from the favourable regulations by PNGRB on the allocation of 100% APM gas as an input for the CNG and domestic PNG business. Further, CGD companies, including MNGL are given highest priority for allocation of APM gas.

 

Volume sales have recovered post the interim impact witnessed in first quarter of current fiscal, caused by the Covid-19 induced lockdown restrictions. Overall, there has been an approximately 80% growth in volumes on a y-o-y basis to 152 mmscm in first half of fiscal 2022 (as against 85 mmscm in first half of fiscal 2021). Considering the revival in consumption expected during the remaining fiscal and contributed by commercialisation of new GAs, volume sales are expected to reach pre-pandemic levels in fiscal 2022.

 

Operating margins have remained elevated at 42.8% during the first half of fiscal 2022, as MNGL has been able to benefit from the moderation in natural gas prices. Such trend in operating margins is expected to continue over the medium term despite the recent hike in APM gas prices by ~60% (i.e. a price increase to $2.9/mmbtu applicable for October 2021 to March 2022 as compared to $1.8/mmbtu applicable for April 2021 to September 2021). MNGL is expected to continue to benefit from the pricing competitiveness of CNG and PNG vs alternate fuels.

 

• Managerial and technical support from the promoters

MNGL was set up as a joint venture (JV) between GAIL and BPCL, each with 22.50% stake and the balance was with financial institutions. In August 2014, IGL acquired 50% stake from financial institutions. GAIL and BPCL are amongst the leading players in the oil and gas segment in India and have strong business and financial risk profiles. They have been successfully managing many such JVs, and, therefore, possess strong operational and technical expertise. IGL, also promoted by GAIL and BPCL, is a leading CGD player with an exclusive position in Delhi. MNGL benefits from the strong managerial and technical support extended by the promoters; its senior personnel have been deputed from the principals. The company also benefits from BPCL's strong retail network and reach in Pune and is setting up its CNG dispensing units at several retail outlets of BPCL in Pune.

 

Project implementation and ramp-up in scale of operations should continue to benefit from the continued operational and technical support from IGL, BPCL and GAIL.

 

Weaknesses:

• Exposure to debt-funded capex plans and project related risks; partly mitigated by a healthy financial risk profile and prudent funding of capex

Capex of around Rs 3,480 crore is expected on the new areas over the next eight years. The capex is likely to be funded in a debt-to-equity ratio of 67:33. Despite this, steady cash accrual and a prudent funding mix are expected to keep the gearing below 1 time over the medium term. Any material change in the capital structure would be a key rating sensitivity factor.

 

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 hold up the project. However, the track record of obtaining requisite approvals in the past mitigates this risk. While there have been delays in implementing the project in fiscal 2021 caused by the Covid-19 led lockdown restrictions placed, the CGD companies have received an extension from PNGRB to compensate for the execution delays caused. Timely execution of the MWP targets within the estimated costs would be a key monitorable factor.

 

• Exposure to regulatory risks

Regulation of natural gas, including CGD, is still in the initial stage in India and hence there is considerable uncertainty regarding the regulatory norms for natural gas allocation and distribution. Though the uncertainty in regulation is expected to subside as the industry attains maturity, any unexpected change in regulations regarding allocation of natural gas and pricing of end-product can adversely impact CGD players like MNGL.

Liquidity: Strong

Cash accruals are likely to be sufficient to support the capex plans and debt repayment obligations. Capex of around Rs 110-170 crore is expected for existing areas in next two fiscals, to be funded through internal cash accruals. Further, expected capex of around Rs 330-390 crore for new areas in the next two fiscals is expected to be funded in a debt-to-equity ratio of 67:33. The equity contribution would be met through internal cash accruals. For the fresh debt availed for the new areas, no repayment obligations to accrue in the initial five years of construction (repayments to begin in fiscal 2025), thus providing further comfort to the cash flow position.

Outlook: Stable

CRISIL Rating expects steady improvement in the operating performance, backed by healthy volume growth and stable realisations

Rating Sensitivity factors

Upward Factors:

• Reduction in project risk with timely and cost-efficiently setting up its CGD network in the newer GAs
• Significant growth in the gas volumes sold, resulting in cash accruals of Rs 350 crore per fiscal

 

Downward Factors:

• Significant delays in project execution for the new GAs won
• Decline in gas volumes sold to below 300 mmscm (million metric standard cubic metre)

About the Company

MNGL was incorporated in January 2006, to implement a CGD project in Pune. It was set up as a JV between GAIL and BPCL, with each holding a stake of 22.5%, and the balance held by financial institutions. In May 2009, PNGRB granted the company exclusive rights for laying, building, operating, and expanding a city or local natural gas distribution network in Pune, including Pimpri-Chinchwad and the adjoining contiguous areas of Hinjewadi, Chakan, and Talegaon. The company has been distributing CNG since October 2008, PNG to domestic consumers since November 2009, and PNG to commercial consumers since January 2010 in Pune city. The marketing exclusivity period was for five years through April 2014 and network exclusivity is for 25 years. In August 2014, IGL acquired 50% stake in MNGL from financial institutions for Rs 190 crore. During fiscal 2016, Maharashtra Industrial Development Corporation bought a 5% stake through fresh issuance of equity shares of Rs 5 crore.

 

The company has won three geographies in Round 9, which include Nashik, Dhule, and Valsad (except areas already authorised); Ramanagara; and Sindhudurg. On factoring the extension permitted by PNGRB for the execution delay caused due to the pandemic, MNGL would have a marketing exclusivity right upto 2026 and network exclusivity rights of upto 2043 for the new GAs.

 

For the six months ended September 30, 2021, MNGL reported profit after tax (PAT) of Rs 116 crore on revenues of Rs 529 crore, against a PAT of Rs 43 crore on revenue of Rs 241 crore for the corresponding period of the previous fiscal.

Key Financial Indicators

Particulars	Unit	2021	2020
Net Revenue	Rs crore	746	985
Profit after tax (PAT)	Rs crore	173	223
PAT margin	%	23.2	22.6
Adjusted debt/adjusted networth	Times	0.33	0.31
Interest coverage	Times	13.91	14.51

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs Cr)	Complexity level	Rating assigned with outlook
NA	Non-Fund Based Limit	NA	NA	NA	160.00	NA	CRISIL A1+
NA	Term Loan	NA	NA	31-Mar-23	80.30	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	31-Jul-25	90.53	NA	CRISIL AA-/Stable
NA	Term Loan	NA	NA	31-Mar-35	1115.00	NA	CRISIL AA-/Stable
NA	Fund-Based Facilities	NA	NA	NA	25.00	NA	CRISIL AA-/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	61.17	NA	CRISIL AA-/Stable
NA	Fund-Based Facilities	NA	NA	NA	25.00	NA	CRISIL AA-/Stable
NA	Non-Fund Based Limit	NA	NA	NA	175.00	NA	CRISIL A1+