Rating Rationale
December 20, 2017 | Mumbai
Petronet LNG Limited
Rating Upgraded to 'CRISIL AAA/Stable' 
 
Rating Action
Rs.600 Crore Non Convertible Debentures (Reduced from Rs.1000 Crore) CRISIL AAA/Stable (Upgraded from 'CRISIL AA+/Positive')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its rating on the non-convertible debentures of Petronet LNG Limited (Petronet) to 'CRISIL AAA/Stable' from 'CRISIL AA+/Positive'.

The upgrade reflects continued strong performance of Petronet's business with higher-than-expected cash accruals driven by ramp-up in utilisation of incremental capacity at the Dahej terminal and increase in utilisation at the Kochi terminal in April-September 2017. The government also supported by renegotiating liquefied natural gas (LNG) supply contract with RasGas contract benefitting Petronet. Financial risk profile also improved, indicated by low gearing of 0.25 time and unencumbered liquidity of approximately Rs. 3400 crore as on September 30, 2017.

The rating continues to reflect Petronet's strong business risk profile, backed by its dominant market position in the re-gasified liquified natural gas (RLNG) business and superior operating efficiency, and healthy financial risk profile reflected in low gearing and high financial flexibility. These strengths are partially offset by continued low capacity utilisation at the Kochi terminal and execution risk associated with other projects to be undertaken. CRISIL expects Petronet will invest prudently in new projects that will be undertaken and only upon tie-up of offtakers and presence of requisite transportation infrastructure.

Key Rating Drivers & Detailed Description
Strengths
* Strong business risk profile:
Petronet controls about 60% of the country's domestic RLNG capacity, which includes its flagship terminal at Dahej with capacity of 15 million tonne per annum (mtpa; largest and oldest in India) and a 5-mtpa terminal at Kochi. It has an established track record and strong relationships with suppliers (RasLaffan Liquefied Natural Gas Co Ltd, Qatar) and intermediate offtakers such as Gail India Ltd (GAIL; 'CRISIL AAA/Stable/CRISIL A1+'), Indian Oil Corporation Ltd (IOCL; 'CRISIL AAA/Stable/CRISIL A1+'), and Bharat Petroleum Corporation Ltd (BPCL; 'CRISIL AAA/Stable/CRISIL A1+'). While domestic regasification capacity in India is likely to increase over the medium term, CRISIL believes Petronet will continue to have a dominant position in the RLNG business.

The entire capacity at Dahej is tied up through take-or-pay contracts or tolling agreements, providing stability to operating profit. These agreements protect Petronet from risks pertaining to capacity utilisation, gas price variability, exchange rate fluctuations, and counterparties. Of the total tied-up capacity, 8.5 mtpa at Dahej and 1.44 mtpa at Kochi are under take-or-pay contracts with suppliers. Additionally 8.25 mtpa is under tolling arrangement (Out of total 8.25 mtpa, 1 mtpa take or pay contract of RasGas is allowed as a set-off). Counterparty risks remain low as intermediate offtakers have a strong credit risk profile. Furthermore, the Dahej terminal has been consistently operating at a capacity utilisation of close to 100% in the past five years. Low capital cost compared to other greenfield terminals supports superior bargaining power. CRISIL believes Petronet will continue to maintain superior operating efficiencies on account of continued high capacity utilisation and stable operating profit.

* Healthy financial risk profile:
Financial risk profile is strong because of healthy gearing of below 0.25 time as on September 30, 2017, and comfortable debt protection metrics, with interest coverage and net cash accrual to total debt ratios of over 8 times and 78%, respectively, for fiscal 2017. Nearly 55% of the expansion at Dahej has been funded through advances from intermediate offtakers, which has also supported superior leverage. Financial risk profile will remain strong over the medium term.

Weaknesses
* 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 faces ramp-up risks due to absence of pipeline connecting the terminal to Bengaluru and Mangaluru. Contribution from the terminal is likely to remain low until evacuation logistics improve. The terminal currently offers value-added services, including bunkering, storage and reload, gassing up, and cool down.

* Execution risks for new projects:
Petronet is currently evaluating other potential investments, including small-scale terminals in India, entry into retail sales, and terminals overseas. CRISIL believes that while these projects may carry implementation and offtake risks over the medium term, Petronet may mitigate these by prudently phasing out large regasification terminal projects, maintaining a funding balance with respect to project debt, and ensuring full pipeline connectivity for evacuation of gas and substantial minimum capacity tie-up for the projects. These will remain key monitorable.
Outlook: Stable

CRISIL believes Petronet's credit risk profile will be stable over the medium term on the back of healthy accrual from incremental capacity. While the company is exploring multiple project options, CRISIL believes it will exercise prudence in their implementation, phasing, and funding.

Downside scenario
* Changes in contractual or tolling structure.
* Weakening of credit metrics on account of large, debt-funded capital expenditure, acquisition, or diversification.

About the Company

Petronet was formed in 1998 by the government 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 has 12.5% equity share totalling 50%, with the balance held by the public. Petronet has a 15-mtpa regasification facility in Dahej, including 5 mtpa commissioned in October 2016, and a 5-mtpa regasification facility in Kochi. Currently, an expansion project of 2.5 mtpa is underway at Dahej.

Key Financial Indicators
As on / for the period ended March 31 Unit 2017 2016
Revenue Rs crore 24551 27208
Profit After Tax Rs crore 1637 929
PAT Margins % 6.7 3.4
Adjusted debt/adjusted networth Times .28 .40
Interest coverage Times 8.5 6.5
Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs Crore) Rating Assigned with Outlook
INE347G08035 Non-convertible debentures Oct-14 9.05% Oct-19 600 CRISIL AAA/Stable
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Non Convertible Debentures  LT  600  CRISIL AAA/Stable    No Rating Change  29-12-16  CRISIL AA+/Positive    No Rating Change  10-10-14  CRISIL AA+/Stable  -- 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies

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