Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Positive/CRISIL A1+’ ratings on the bank facilities of Torrent Gas Moradabad Limited (TGML; part of the Torrent Gas group [TGG]).

 

CRISIL Ratings expects improving scale of operations and improved operating performance of TGG to improve in fiscal 2024 because of the implementation of the Kirit Parikh committee recommendation in April 2023. TGG will also benefit from the strong credit profile of the ultimate holding company, Torrent Investments Pvt Ltd (TIPL), supported by the credit profiles of the operating companies, Torrent Pharmaceuticals Ltd (Tpharma) and Torrent Power Ltd (TPL; ‘CRISIL AA+/Stable/CRISIL A1+’).

 

The fiscal 2022 results for TGG were in line with expectations, driven by the strong performance of Torrent Gas Pvt Ltd (TGPL, rated CRISIL AA-/Positive/A1+), Torrent Gas Pune Ltd (TGPUL, rated CRISIL AA-/Positive/A1+), Sanwariya Gas Ltd (SGL, rated CRISIL A+/Positive/A1+) and TGML. Revenue and earnings before interest, taxes, depreciation and amortisation (Ebitda) for TGG surged to Rs 1,020 crore and Rs 310 crore, respectively, from Rs 312 crore and Rs 89 crore, respectively, in fiscal 2021.

 

For fiscal 2023, revenue is estimated at Rs 2,437 crore, driven by healthy volume growth in the fiscal. However, Ebitda is estimated to decline to Rs 130 crore. Moderation in operating margin was due to the significant increase in administrative price mechanism (APM) gas prices, driven by the global energy crisis amid the Russia-Ukraine conflict. While the group did raise selling prices, this was done in phases and could not match the increase in cost.

 

CRISIL Ratings expects robust revenue growth and improved operating profitability for TGG over the medium term, driven by TGPL, Torrent Gas Chennai Pvt Ltd (TGCPL, rated ‘CRISIL A+/Positive/CRISIL A1+’) and Torrent Gas Jaipur Pvt Ltd (TGJPL, rated ‘CRISIL A+/Positive/CRISIL A1+’), backed by ramp-up in operations because of capital expenditure (capex), and sustained healthy performance in TGPUL, SGL and TGML. Operating profitability should be supported by the Kirit Parikh committee recommendations being implemented since April 2023, wherein input cost for APM gas price will be regulated between $4.5-6.5 per mmbtu. This will mitigate the level of uncertainty in gas procurement cost for city gas distribution (CGD) players and enable price reduction for end customers, which will support demand growth. Increased volume is expected to support profitability by reducing fixed operating cost. This, along with improved demand prospects, should result in continued capex by TGG to increase CGD infrastructure. Continued increase in volume growth with improvement in operating profitability, resulting in increased self-sustainability of the business, will be a key monitorable and could result in an upgrade.

 

The ratings continue to reflect the strong financial, operational and managerial support expected from the parent TIPL, and benefits derived from a regulation-driven market monopoly. The ratings also factor in the government's favourable view regarding CGD and the increasing priority of the sector in allocation of gas from the domestic gas backet. These strengths are partially offset by susceptibility to market related risks and project-implementation risks.

 

CRISIL Ratings notes that the ultimate parent, TIPL, is one of the bidders for Reliance Capital Ltd under the Corporate Insolvency Resolution Process (CIRP). The Supreme Court had allowed parties to participate in the process as directed in the National Company Law Appellate Tribunal (NCLAT) order for a second round of auction. The Hinduja group was the only bidder in the said round with a final valuation of Rs 9,650 crore as TIPL — the highest bidder in the first round — and other players had withdrawn from the bidding process. However, as the matter is sub judice in the Supreme Court, further developments on that front and any material impact on the financial flexibility of TIPL due to any significant debt-funded acquisition or incremental investment or support from TIPL will be key rating sensitivity factors.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of TGPL, TGCPL, TGPUL, TGML, TGJPL, Dholpur CGD Pvt Ltd (DCPL) and SGL. These constitute all the SPVs of the Torrent group in the gas business, collectively referred to as TGG. This is in line with the CRISIL Ratings criteria for rating entities in homogenous groups. All the entities under the group are in the same business and have common management and treasury. Furthermore, post debt servicing, excess cash flow, subject to meeting the restrictive payment conditions, will be available for covering any shortfall across the group.

 

The TGG management intends to consolidate/merge some of the SPVs over the medium term, subject to regulatory approvals, to optimise the number of SPVs. The management has already filed for National Company Law Tribunal (NCLT) approval for merging TGPUL, SGL and TGML with TGPL. While approval from the creditors has been received, final approval from NCLT is awaited.

 

After arriving at the ratings of TGG, CRISIL Ratings has applied its parent notch-up framework to factor in the extent of distress support expected from TIPL, the ultimate parent. CRISIL Ratings has factored in the strategic importance of TGG to TIPL and the strong financial and managerial support provided by the parent. CRISIL Ratings has also applied its holding company criteria for analysing the credit risk profile of TIPL. For the calculation of the ratio of market value of investments to debt, CRISIL Ratings has considered the standalone debt and the extent of support expected from TIPL.

 

Please refer to Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Healthy financial, operational and managerial support from the parent

The Torrent group entered the CGD space in 2018 through the acquisition of TGPUL and won 13 geographical areas (Gas) in the 9th and 10th bidding rounds of the Petroleum and Natural Gas Regulatory Board (PNGRB). Today, TGG is present in 17 GAs through seven entities with total area under authorisation exceeding 1.25 lakh square kilometre (sq m). TGG is likely to receive strong financial, operational and managerial support from TIPL, given that CGD is a strategic focus area for the group.

 

TIPL has extended a corporate guarantee for the project loans of key SPVs (TGPL, TGCPL), which is valid for 5-8 years from now. The parent has also given an unconditional, irrevocable and continuing corporate guarantee for the interim short-term facilities of the SPVs. The high moral obligation to support is underscored by the shared Torrent brand.

 

TIPL has strong financial flexibility, driven by the market value of unencumbered investments held in Tpharma (71.25% shareholding) and TPL (53.56% shareholding). As of May 26, 2023, the market value was ~Rs 55,500 crore, which is substantial in relation to the borrowings of TGG that are supported by TIPL, leading to a healthy market value of investments to liability cover, as TIPL does not have any other external debt. For any additional CGD license contracted by TGG, the investment and incremental support from TIPL will be key sensitivity factors.

 

The key operating companies have a track record of dividend payment. The average dividend income of TIPL was over Rs 611 crore during fiscals 2019 to 2022. Both TPL and Tpharma will endeavor to pay dividend of 40% of the consolidated net profit, as per their stated policy, which should suffice for the equity requirement towards TGG. CRISIL Ratings believes the strong credit profile of the companies and the diversity in their businesses will enable steady dividend inflow for TIPL, which should support equity funding for TGG.

 

Regulation-driven market monopoly

As per PNGRB’s letter of authorisation (LoA), TGPL, TGCPL, TGJPL and DCPL will have marketing exclusivity of 8-10 years and network exclusivity of 25 years for the licensed GAs. This will help tap the expected growth in the gas sector in the areas. TGG will also benefit from the high price arbitrage compressed natural gas (CNG) commands over petrol/diesel, which should encourage speedy conversion. While marketing exclusivity has already expired for TGPUL, TGML and SGL, the companies are cushioned from competition due to inherent entry barriers and the high operating efficiency of TGG.

 

Nevertheless, the group remains susceptible to the threat from electric vehicles (EVs) over the long run, especially in the CNG segment. To overcome this, it is focused on having equal exposure to the piped natural gas (PNG) segment, and will benefit from the ban by National Green Tribunal (NGT) over use of dirty fuels, which has been pushing industries to convert to PNG.

 

Favourable outlook of the government towards CGD with increased priority in allocation of domestic gas to the sector

The government has given first priority to the CNG-transport and PNG-domestic segments in domestic gas allocation to nudge customers towards cleaner and environment-friendly fuel options (over petrol and diesel). Rising domestic gas prices have increased cost pressures and have partially impacted volume growth, which are mitigated by the government push and regulated nature of business. However, implementation of the Kirit Parikh committee recommendations is expected to benefit CGD players against procurement risk as it provides for capping APM gas cost from April 2023 — the price was earlier driven by international gas prices. Also, priority allocation from domestic gas basket (including gas from HPHT fields) to CGD players has been mandated, which shall further ensure availability of cheaper gas to CGD players. Furthermore, to meet the requisite demand, TGG has tied-up 2-5 year gas supply agreements (GSA) for all its GAs with Gas Authority of India Ltd (GAIL), Reliance Industries (RIL) and GSPL India Gasnet Ltd (GIGL), which will help it tide over sudden outage and volatility in the spot market. The domestic gas made available for CNG and PNG comprised about 89% of total consumption for TGG in fiscal 2023 (up from ~84% earlier) and the balance is met mainly through other medium-term contracts and deep water sources. Any change in the gas allocation policy will be a monitorable.

 

Weakness:

Exposure to project risks and inorganic acquisitions in the CGD space

TGG will remain exposed to project risks as its project-phase subsidiaries, TGPL, TGCPL and TGJPL, are in the initial stage of operation. These entities have budgeted total capex of Rs 6,000-7,000 crore for five years from the date of authorisation. However, the capex plans may be postponed by two years in line with the force majeure extension provided by PNGRB because of Covid-19. That said, the ramp-up in the operations of TGPUL, SGL and TGML demonstrates the group’s ability to quickly turn around existing GAs.

 

Exposure to market-related risks

CRISIL Ratings believes TIPL will remain susceptible to market-related risks as its financial flexibility, in terms of debt coverage, will depend on prevailing market conditions and the share prices of Tpharma and TPL. Although the relative stability of cash flow from both the power and pharma businesses helps, any increase in systemic risks, leading to a sharp decline in the share prices of Tpharma and TPL, will be a key rating sensitivity factor.

Liquidity: Strong

CRISIL Ratings believes TGG is strategically important to TIPL, and hence, will continue to receive strong financial support from the parent. The parent enjoys robust liquidity driven by financial flexibility given the market value of Rs 55,500 crore of unencumbered investments in operating companies (TPL and Tpharma) and nil external debt as on March 31, 2023. TGG is likely to generate accrual of about Rs 200 crore over the medium term. Furthermore, the project-phase entities benefit from the long tenure for debt servicing — 14 years including 7 years of moratorium — which will help allay pressure on cash flows during the stabilisation phase.

Outlook: Positive

CRISIL Ratings believes the credit profile of TGG could improve with ramp up in revenue and profitability, along with continued need-based support from TIPL.

Rating Sensitivity Factors

Upward factors

• Increase in revenue and profitability of TGG including TGML
• Upgrade in the rating of TPL or improvement in the credit risk profile of Tpharma

 

Downward factors

• Significant decline in revenue and profitability of TGG or TGML on continual basis
• Downgrade in the rating of TPL or weakening in the credit risk profile of Tpharma
• Any change in the nature or extent of support from TIPL or significant decline in the market value of its investments to adjusted debt cover

About the Company

Incorporated in 2005, TGML supplies PNG to domestic, commercial and industrial users, besides retailing CNG through its CNG stations in Moradabad.

 

For fiscal 2023, revenue is estimated at Rs 245 crore driven by higher volume and prices, and Ebitda is estimated at Rs 38 crore. The Ebitda declined over the previous fiscal mainly on account of increase in gas prices.

About the ultimate parent, TIPL

TIPL is the holding company for the Torrent group, with business interests across power and pharmaceuticals. TIPL held 53.56% of the total shareholding in TPL and 71.25% in Tpharma as on March 31, 2023. As of March 2023, TIPL has infused around Rs 1,675 crore of equity in TGPL.

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	Term Loan	NA	NA	Mar-33	60	NA	CRISIL AA-/Positive
NA	Overdraft Facility	NA	NA	NA	5	NA	CRISIL AA-/Positive
NA	Bank Guarantee&	NA	NA	NA	30	NA	CRISIL A1+
NA	Bank Guarantee*	NA	NA	NA	9	NA	CRISIL A1+
NA	Proposed Non Fund based limits	NA	NA	NA	16	NA	CRISIL A1+
NA	Rupee Term Loan	NA	NA	Sep-28	45	NA	CRISIL AA-/Positive

&Fungibility across sub-limits (SBLC, PBG, Capex LC),

*PBG of Rs 8 crore, SBLC of Rs 8 crore and STL/overdraft (OD) of Rs 1 crore as a sublimit