Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable’ rating on the corporate credit rating of Petronet LNG Limited (Petronet).

 

The rating reflects the strong business risk profile of Petronet, backed by its dominant market position in the re-gasified liquified natural gas (RLNG) business, superior operating efficiency and healthy financial risk profile.

 

The long-term take-or-pay contracts and tolling agreements primarily insulate the performance of the Dahej (Gujarat) terminal, from any fluctuations faced in its utilisation levels. Utilisation levels of the Dahej terminal ramped-up during the first nine months of fiscal 2024 to 96%, following moderation in RLNG prices (78% in fiscal 2023 and 88% in fiscal 2022). With RLNG prices expected to remain rangebound over the medium term, capacity utilisation is expected to remain strong. Pending completion of the Kochi-Bengaluru pipeline, the Kochi (Kerala) terminal continues to operate at a modest 20-25% levels.

 

Petronet is evaluating various proposals to expand its reach, both in the domestic as well as international markets. It plans to augment the capacity of its Dahej terminal from the current 17.5 million metric tonne per annum (MMTPA) to 22.5 MMTPA, expected to be commissioned by early fiscal 2026. It also is evaluating setting up a 4 MMTPA LNG terminal [floating storage regasification unit (FSRU) based] on the east coast, which currently is still at a planning stage. CRISIL Ratings believes that Petronet would prudently invest in new projects that will be undertaken only after tying-up with offtakers and ensuring presence of requisite transportation infrastructure.

 

Petronet has received the board approval to diversify and venture into the petrochemicals business, wherein it would be setting-up an integrated petrochemicals complex having Propane Dehydrogenation (PDH) unit with a capacity of 750 kilo tonne per annum (KTPA), a 500 KTPA Poly Propylene (PP) unit, as well as propane and ethane handling and storage facilities [the petchem project]. The size of the petchem project is quite large and into a new product (petrochemicals) manufacturing business for Petronet which has traditionally been engaged in RLNG business. It entails capital expenditure (capex) of ~Rs 20,685 crore (revised from Rs 15,000 crore estimated earlier) and will be executed over the next 4-5 years exposing it to project and implementation risks. The company has filed for environmental clearance, which is expected to be received soon. While company has currently a board approval for debt to equity funding in 70:30 ratio, the company’s strong balance sheet and the healthy cash accruals earned from existing operations could warrant a lower requirement of debt funding. Progress on the project implementation including receipt of regulatory approvals, tie-up for raw-material sourcing and products off-take, funding tie-ups including any cost-overruns over the implementation period remain the key monitorables.

Analytical Approach

• The standalone business and financial risk profile of Petronet has been considered for analysis.
• With adoption of Ind AS 116 with effect from April 01, 2019, lease liabilities are treated as debt along-side adjustments made in depreciation and amortization and interest cost components.

Key Rating Drivers & Detailed Description

Strengths:

• Strong business risk profile: Petronet controls nearly 50% of the domestic RLNG capacity, which includes its flagship terminal at Dahej, with capacity of 17.5 MMTPA (the largest and oldest facility in India) and a 5-MMTPA terminal in Kochi. It has an established track record and strong relationship with suppliers (RasLaffan Liquefied Natural Gas Co Ltd, Qatar) and intermediate offtakers such as Gail India Ltd, Indian Oil Corporation Ltd (IOCL; ‘CRISIL AAA/Stable/CRISIL A1+’), and Bharat Petroleum Corporation Ltd (BPCL; ‘CRISIL AAA/Stable/CRISIL A1+’). While domestic regassification capacity is likely to increase over the medium term, Petronet may retain its dominant position in the RLNG business.

 

The capacity at Dahej is almost tied-up through take-or-pay contracts or tolling agreements, providing stability to operating profits. These agreements protect Petronet from risks pertaining to capacity utilisation, gas price variability, exchange rate fluctuations, and counterparties. Of the total tied-up capacity, 7.5 MMTPA at Dahej and 1.44 MMTPA at Kochi are under take-or-pay contracts with suppliers/customers. Additionally, 8.25 MMTPA is under tolling arrangements. Counterparty risks remain low as intermediate offtakers have a strong credit risk profile. Although the Dahej terminal has been operating at ~90-100% historically, utilisation had moderated in fiscals 2022 and 2023 owing to high gas prices and moderate demand, however, it improved again to ~95% in the first six months of fiscal 2024 following moderation in gas prices. Utilisation is expected to remain strong over the medium term, even after the planned implementation of the 5 MMTPA capacity expansion at Dahej. Favourable location and low capital cost compared to other greenfield terminals, provides superior bargaining power. CRISIL Ratings believes Petronet will maintain its superior operating efficiency owing to continued high-capacity utilisation and stable operating profits.

 

• Healthy financial risk profile: Financial risk profile continues to be strong, marked by comfortable debt protection metrics, with interest coverage of over 16.43 times for fiscal 2023. Earnings before interest, depreciation, tax and amortisation (EBIDTA) of more than Rs 4,500 crore annually for the past three years coupled with lower capital have led to healthy return on capital employed (RoCE) of above 30%. Liquidity position was adequate at ~Rs 7,800 crore as on September 30, 2023, imparting healthy financial flexibility. While the petchem project entails 70% debt funding, the company is committed to increase equity funding using internal accruals, with debt drawdown expected later in the 4-5 year implementation time-frame, given strong balance sheet, healthy accruals, and liquidity position. Capex plans other than petchem is expected to be internally funded over the medium term. Accordingly, financial risk profile is expected to remain strong over the medium term.

 

• Expansion plans using internal accrual with low reliance on debt: The Dahej terminal is being expanded from the current 17.5 MMTPA to 22.5 MMTPA, to be commissioned effective the first quarter of fiscal 2026 (including 2 LNG tanks which will be ready in this fiscal) at a total cost of around Rs 1,800 crore. Petronet is also setting up the third jetty at Dahej at a total cost of ~Rs 1,600 crore which too is expected to be commissioned by 2026. The FSRU terminal in Gopalpur on the east coast having planned capex of Rs 2,300 crore is still at a planning stage apart from the new petchem project recently approved by Petronet’s board.

 

Planned investments being underatken by the company are likely to be funded through internal accruals (except for the Petchem project) given the healthy annual net cash accruals which is expected to increase from Rs 2,300-2,500 crore levels post expansion of Dahej’s capacity by 5 MMTPA. Further, while the company continues to explore multiple project expansion options, it may exercise prudence in their implementation, phasing and funding.

 

Weaknesses:

• Execution risks for the new petchem project: Petronet has recently received the board approval for setting-up a large Rs 20,685 crore petchem project at the existing LNG terminal land. While the total cost of the project has increased from ~Rs 15,000 crore earlier, it enjoys integration benefits including common jetty, cold power, and common utilities. Petronet has also entered into off-take agreements with a customer for sale of 250 KTPA PP for 15 years period with an option to extend further, as well as for sale of 11 KTPA of hydrogen. It is also in the process of further tie-ups and agreements to secure raw material sourcing as well as off-takes.

 

The petchem project is large sized, having an execution timeline of 4-5 years, planned debt funding of 70% and into a new product manufacturing business away from its core RLNG business. With staggered implementation over the next 4-5 years, and the company’s strong balance sheet, requirement of debt draw-down could be lower. The company has filed for environmental clearances for the petchem project which is expected to be received soon. Progress on the project implementation including receipt of regulatory approvals, tie-ups for raw-material sourcing and products off-take, funding tie-ups including any cost-overruns over the implementation period remain the key monitorables.

 

• Low-capacity utilisation at Kochi terminal: The Kochi terminal was commissioned in September 2013, with about 30% capacity tied-up in contractual agreements. However, it faced ramp-up risks due to the absence of pipeline connecting the terminal to Bengaluru and Mangaluru, leading to utilisations being low at around 20% over the past three years ended fiscal 2023.

 

The Kochi terminal utilisation is expected to improve to 30-35% with expected commissioning of the pipeline; and remains a key monitorable. Additionally, the Kochi terminal also offers various value-added services, including bunkering, storage and reload, gassing up, and cooling down which support its utilisations.

Liquidity: Superior

Liquidity, driven by annual cash accrual of more than Rs 2,500 crore, stood at a healthy Rs. 7,800 crore as on September 30, 2023. Petronet also has access to secured fund-based intra-day limit of Rs 500 crore with nominal utilisation. Ample liquidity coupled with moderate accruals would enable Petronet to fund its near-term expansion plans, internally, over the medium term. With nil gearing as on March 31, 2023, Petronet has sufficient headroom, to raise additional debt to meet its capex requirements, if the need arises.

 

Environment, Social, and Governance (ESG) profile

CRISIL Ratings believes that the company’s Environment, Social, and Governance (ESG) profile supports its credit risk profile, which further benefits from the support received from its PSU promoters.

The oil and gas sector has a significant impact on the environment due to the high carbon emissions released from the refineries and petrochemical plants. In line with this, Petronet has been continuously focusing on mitigating its environmental and social risks to ensure minimal impact. 

 

Key ESG highlights:

• Petronet is not an environment-footprint heavy organisation, however it is conscious of the environmental impact of the oil and gas industry. In this regard, Petronet's contribution is in the form of its end product, i.e., natural gas, which is a cleaner form of fuel as compared to fossil fuels such as coal and petroleum.
• Company is installing solar rooftops at Dahej and Kochi terminals to further reduce carbon footprint and contribute to the renewable energy drive.
• As a step towards conservation of water, Company operates a 100 kilo litres per day sewage treatment plant at Dahej and a 30 kilo litres per day sewage treatment plant at Kochi.
• Petronet has defined Quality, Health, Safety and Environment (QHSE) Policy. Company has completed 25 million accident free safe man hours at Dahej in Nov 23
• Petronet's governance structure is characterised by 33% of the board comprising independent directors (none of them having tenure exceeding 10 years), split in chairman and CEO positions, dedicated investor grievance redressal mechanism and healthy disclosures

There is growing importance of ESG amongst investors and lenders. The commitment of Petronet to ESG principles will play a key role in enhancing stakeholder confidence, given high share of foreign investors.

Outlook: Stable

Petronet’s credit risk profile is expected to remain stable over the medium term due to healthy terminal utilisation and stable profitability. While the company is exploring multiple project options, CRISIL Ratings believes it will exercise prudence in their implementation, phasing, and funding.

Rating Sensitivity factors

Downward factors:

• Changes in contractual or tolling structure, impacting overall capacity utilisation levels to below 70%
• Weakening of credit metrics due to large, debt-funded capex, acquisition, or diversification

About the Company

Petronet was formed by the government in 1998, to import LNG and set up LNG terminals. It commenced commercial operations in April 2004. It is a joint venture of GAIL, Oil and Natural Gas Corporation Ltd, IOCL, and BPCL; each have 12.5% equity share totalling 50%, with the balance held by the public. Petronet has a 17.5-MMTPA regasification facility in Dahej and a 5-MMTPA regasification facility in Kochi.

 

For the nine months ended December 31, 2023, profit after tax (PAT) was Rs 2,799 crore on net sales of Rs 38,935 crore, against Rs 2,626 crore and Rs 46,025 crore, respectively, for the corresponding period in the previous fiscal.

Any other information: Not applicable