Rating Rationale
July 24, 2020 | Mumbai
HPOIL Gas Private Limited
Rating Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.450 Crore
Long Term Rating CRISIL AA-/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA-/Stable' rating on the long-term bank facility of HPOIL Gas Pvt Ltd (HPOIL Gas), an equal joint venture (JV) between Hindustan Petroleum Corporation Ltd (HPCL; rated 'CRISIL AAA/FAAA/Stable/CRISIL A1+') and Oil India Ltd (OIL).

The rating continues to reflect the strong managerial, operational, and financial support from the promoters, and benefits derived from a regulation-driven market monopoly. The rating also factors in moderate risk of gas availability and benefits derived from the government's favourable view regarding the city gas distribution (CGD) sector. These strengths are partially offset by susceptibility to project-related risks, especially in regard to delay in capital expenditure (capex; against minimum work programme [MWP]), and changes in government regulations for the natural gas industry.

There have been some delays in both geographical areas (GAs), Ambala-Kurukshetra and Kolhapur, in project execution till date mainly on account of GA-specific issues in fiscal 2020 and owing to Covid-19. However, these may be made up for with a faster pace of execution over the medium term. Moreover, since the project is equity-funded till now, there is no build-up of interest during construction.

Analytical Approach

CRISIL has applied its parent notch-up framework to factor in the extent of support from HPCL and OIL. The company will continue to enjoy operational, financial, and managerial support from its promoters in a timely manner. CRISIL understands that in case of stress the JV partners will provide timely support. Any change in this stance will be a rating sensitive factor.

Key Rating Drivers & Detailed Description
Strengths: 
* Healthy managerial, operational, and financial support from the promoters
HPCL and OIL have strong business and financial risk profiles, and robust operational and technical knowhow. HPCL has extensive experience in refining crude oil and marketing petroleum products, and is also involved in the CGD business by way of participation in JVs with GAIL India Ltd through Bhagyanagar Gas Ltd, Avantika Gas Ltd, and Godavari Gas Pvt Ltd. The other JV partner, OIL, is engaged in oil exploration and production, and laying of pipelines for transportation of oil and gas; it also produces liquefied petroleum gas. The JV will benefit from HPCL's strong presence in retail which will make available retail outlets to the JV on commercial terms. Extensive experience of the promoters in obtaining gas from various sources, both domestic and foreign, should benefit the company.
The board comprises four directors, two each from HPCL and OIL. Key management personnel are also deployed from them. This helps to ensure promoter support as well as leverage their experience for project implementation and operations. The company also benefits from its promoters' strong financial flexibility and ability to tie up debt for projects.
 
* Regulation-driven market monopoly for five years
As per the approval received from the Petroleum and Natural Gas Regulatory Board (PNGRB), the company will have marketing exclusivity of 5 years and network exclusivity of 25 years for its CGDs. It is, therefore, well-positioned to tap the expected growth in the gas sector in its respective CGDs. Benefits should also accrue from the first-mover advantage in distribution in the respective CGDs over the medium term. The company is also likely to build a healthy consumer and industrial base in the piped natural gas (PNG) segment, and expand in the compressed natural gas (CNG) segment once adequate infrastructure is in place in the CGDs.
 
* Moderate risk in gas availability supported by favourable outlook of government towards the sector
The total gas requirement between fiscals 2021 and 2024 is expected to be 0.03-0.11 million metric standard cubic metre per day (mmscmd) for Kolhapur GA in Maharashtra, and 0.05-0.10 mmscmd for Ambala and Kurukshetra GA in Haryana. The company is eligible to get cheaper domestic gas for CNG and domestic PNG sales. Kolhapur and Ambala-Kurukshetra GAs will be getting gas supplies from tap-off point on GAIL's Dabhol Bengaluru pipeline and DadriBawana-Nangal pipeline, respectively. Sufficient capacity is available in these pipelines, as required under common carrier basis as per PNGRB regulations.
 
Weaknesses:
* Exposure to project implementation and stabilisation risks
The project is still in early stages of execution. Total cost for over 25 years (project life) is expected to be about Rs 1,500 crore. Major approvals are in early stage'including land acquisition (primarily for city gate stations), right of way, and right of use'and the company is obtaining these on an ongoing basis. It has to apply to the ministry of petroleum and natural gas (MoPNG) for domestic gas allocation well in advance of the date of commencement of operations. However, non-allocation or delay in obtaining allocation may adversely impact margins in the PNG (domestic) and CNG segments.
Nevertheless, as against a typical project funding wherein there are no cash flows during implementation period, for a CGD network cash flows can commence once a part of the network is implemented and PNG and CNG sales begin, typically in the second year of operations. Also, promoters' support for any cost overrun and the long-tenure of debt of 12.5 years, including moratorium of 2.75 years during the initial capex phase and then after ballooning quarterly repayment for 10 years, will support the project during the stabilisation period.
 
* Susceptibility to changes in government regulations for the natural gas industry
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 such as HPOIL Gas.
Liquidity Strong

The company will be funding initial capex of Rs 641 crore with debt of Rs 450 crore and equity of about Rs 96 crore each from both the JV partners; as on March 31, 2020, the promoters have contributed Rs 60 crore each, which includes interest during construction. Moreover, debt to be availed has a moratorium of 2.75 years during the initial capex phase and then after ballooning quarterly repayment for 10 years. Additionally, the parents, HPCL and OIL, are public sector undertakings with Maharatna and Navratna status, respectively, and strong business and financial risk profiles, and should support cost or time overrun, if any.

Outlook: Stable

CRISIL believes HPOIL Gas will remain strategically important to HPCL and OIL, and will continue to receive timely support during project implementation and after commencement of operations.

Rating Sensitivity factors
Upward factors
* Higher-than-expected cash accruals post commissioning
* Substantial progress against the MWP and interest cover of over 2x
 
Downward factors
* Deterioration in the credit quality of either promoters by one notch 
* Lower-than-expected support from the promoters
* Time or cost overrun, or significant underachievement of the MWP target
About the Company

HPOIL Gas, incorporated on November 30, 2018, is an equal JV of HPCL and OIL. Under the eighth round of CGD bidding, the company was authorised by PNGRB through its orders dated February 22, 2018, and March 6, 2018, to lay, implement and operate CGD networks in Ambala-Kurukshetra and Kolhapur, respectively. Authorisation provides infrastructure exclusivity of 25 years and marketing exclusivity of 5 years in both the GAs. Expected project cost, under the MWP as given by PNGRB, is about Rs 641 crore and is to be funded in a debt-to-equity ratio of 70:30. The scheduled commercial operational date is April 1, 2023.

Key Financial Indicators*
As on/for the period ended March 31   2020 2019
Revenue Rs crore 2.2 NA
Profit after tax (PAT) Rs crore -2.8 -0.5
PAT margin % -128.1 NA
Adjusted debt/adjusted networth Times NA NA
Interest coverage Times NA NA
*Financial indicators not meaningful, as company was incorporated in fiscal 2019

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
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 Rupee Term Loan* NA NA Mar-33 450 NA CRISIL AA-/Stable
*Including sub-limits by way of letter of credit/ bank guarantee facility up to Rs 112.25 crore
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  450.00  CRISIL AA-/Stable      09-04-19  CRISIL AA-/Stable    --    --  -- 
All amounts are in Rs.Cr.
 
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Rupee Term Loan* 450 CRISIL AA-/Stable Rupee Term Loan# 450 CRISIL AA-/Stable
Total 450 -- Total 450 --
*Including sub-limits by way of letter of credit/ bank guarantee facility up to Rs 112.25 crore
#Including sub-limits by way of (i) letter of credit facility up to Rs 115 crore and (ii) bank guarantee facility up to Rs 115 crore
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Upstream Oil and Gas Sector
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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