| Bharat Gas Resources Limited | ||||||
| Long-term rating removed from 'Watch Developing'; Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has removed its rating on the long term bank facilities of Bharat Gas Resources Limited (BGRL) from ‘Rating Watch with Developing Implications’ while reaffirming the rating at ‘CRISIL AA+’ and a ‘Stable’ outlook has been assigned to the long-term rating. The short term rating has also reaffirmed at 'CRISIL A1+'.
The rating watch has been resolved following an announcement by Department of Investment and Public Asset Management (DIPAM) that the Government of India (GoI) has called off the present expression of interest (EoI) process for strategic divestment of Bharat Petroleum Corporation Ltd. (BPCL; ‘CRISIL AAA/Stable/CRISIL A1+’), which owns 100% stake in BGRL. CRISIL Ratings had earlier placed BGRL’s long-term rating on watch, following a similar rating action on BPCL. BPCL’s long-term rating was placed on watch, following a receipt of approval from the Cabinet Committee on Economic Affairs (CCEA), for strategic divestment of GoI’s 52.98% stake in BPCL, along with transfer of management control to a strategic buyer.
The ratings continue to reflect the strong managerial, operational, and financial support BGRL receives from BPCL, driven by the strategic importance of the company to the parent’s vision and strategy to develop the natural gas business. On March 22, 2021, BPCL’s board of directors approved the merger of BGRL with itself, subject to receipt of regulatory approvals. The merger is aimed to optimise the value of BPCL in the context of its divestment, improve the corporate structure and optimise resources utilisation. Given the regulatory and procedural requirements, the merger is expected to be completed by July 2022.
Standalone business risk profile is expected to remain healthy, contributed by the expected build-up of the city gas distribution (CGD) business in BGRL. This business enjoys regulation-driven market exclusivity in the allocated geographical areas (GAs), favourable regulations relating to allocation of low-cost administered pricing mechanism (APM) gas as an input for the compressed natural gas (CNG) and domestic piped natural gas (PNG) businesses, and freedom in pricing of products.
These strengths are partially offset by continued exposure to project risks as the company is setting up its CGD network in the 13 GA’s won during the 9th and 10th CGD bidding round, and implementing 4 GA’s of the parent. It is also susceptible to changes in government regulations regarding the natural gas industry. |
Analytical Approach CRISIL Ratings has applied its parent notch-up framework to factor in the extent of support from BPCL. Furthermore, BPCL's strategic importance to and expectation of continued support from the government benefits BGRL, considering its criticality to BPCL. |
Key Rating Drivers & Detailed Description Strengths:
As on May 31, 2022, BPCL has infused Rs. 1,758 crore in BGRL. Key management personnel (marketing and finance) are deputed by BPCL. Moreover, two out of four directors on the board are from the parent. BPCL's 100% ownership in and the strategic importance of BGRL underscores the moral obligation of the parent to provide timely and need-based support.
Around half of the supply of the bulk gas trading business of BGRL is for BPCL's consumption in its refineries, while the remaining is secured through long-term contracts with RasGas Company Ltd and Mobil Australia. BPCL and BGRL will be the sole distributor of CNG in the 17 CGD projects bagged in the PNGRB auction. As part of the agreements, the company has marketing exclusivity in the projects for 5-8 years from the date of their respective authorisation. It also has network exclusivity for 25 years. The CGD operations are expected to benefit from favourable regulations like priority in allocation of cheaper domestic APM gas for 100% of the requirement in CNG transport and PNG-domestic segments, and freedom in determining end user prices.
Weaknesses:
BGRL is implementing 13 GA’s authorized to it in the PNGRB auction with estimated capital expenditure (capex) of more than Rs 11,000 crore, intended to be funded in a debt-to-equity ratio of 65:35. However, currently capex is being funded through equity only. Implementation risks include getting approvals from local and state government bodies for laying pipeline grids and setting up dispensing centres. Any delay in obtaining approvals can affect the timely completion of the minimum work programmes (MWP). The capex for the GAs is being funded mainly through equity infusions and hence timely raising of funds to finance the remaining project cost is a monitorable. The project returns are contingent on timely shift in demand from existing fuels (for transport, domestic and industrial purposes) to natural gas.
As per the Government directives 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 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.
The Government has recently revised its guidelines on allocation and supply of pooled gas wherein GAIL along with monitoring the supply of APM domestic gas will also be responsible for sourcing the required non-APM gas/imported LNG to meet the players CNG and domestic PNG sale requirements. BGRL’s ability to maintain its per unit operating profitability amidst this changing business dynamics, would remain a key monitorable. |
Liquidity: Strong BGRL had cash balance of Rs 607crore as on March 31, 2022. As on date, no debt has been drawn down and hence there are no debt repayment obligations. |
Outlook: Stable CRISIL Ratings expects steady improvement in the operating performance, backed by healthy volume growth and stable realisations. BGRL is expected to continue to benefit from the parental support received from BPCL. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company BGRL, a wholly owned subsidiary of BPCL, was incorporated on June 7, 2018. While the entire gas business of BPCL initially was to be transferred to BGRL which would include the gas trading, gas-related investments, and related agreements including assets and liabilities (largely in the form of joint ventures), and the CGD-related businesses; BGRL would ultimately get merged with BPCL. |
Key Financial Indicators
*Provisional figures |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
*Interchangeable with standby letter of credit |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||
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Criteria Details
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