Rating Rationale
July 25, 2019 | Mumbai
Mahesh Gas Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.409 Crore (Reduced from Rs.425 Crore)
Long Term Rating CRISIL A/Stable (Reaffirmed)
Short Term Rating CRISIL A1+(SO) (Reaffirmed)
Short Term Rating Provisional CRISIL A1+(SO)^ (Withdrawn)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
^A prefix of 'Provisional' indicates that the rating centrally factors in the strength of specific structures, and will be supported by certain critical documentation by the issuer, without which the rating would either have been different or not assigned ab initio. This is in compliance with a May 6, 2015 directive by Securities and Exchange Board of India (SEBI), 'Standardising the term, rating symbol, and manner of disclosure with regards to conditional/ provisional/ in-principle ratings assigned by credit rating agencies (CRAs). 
Detailed Rationale

CRISIL has reaffirmed 'CRISIL A/Stable/CRISIL A1+(SO)' ratings to the proposed term loan and non-fund based facility of Mahesh Gas Limited (MGL) and also withdrawn its 'Provisional CRISIL A1+(SO)' rating to the Rs. 16 crore non-fund based facilities on the request of the company. The withdrawal is in line with CRISIL's withdrawal policy.

The rating of non-fund based facility is based on the strength of the unconditional, irrevocable, and comprehensive guarantee extended by the parent, Torrent Private Limited (TL), and reflects the latter's credit strength. The rating is supported by a proposed payment mechanism that will ensure timely debt servicing. TL has strong financial flexibility, supported by large unencumbered equity stakes in TPL (Torrent Power Ltd) and Torrent Pharmaceuticals Ltd (TPharma).

CRISIL's rating on the proposed long term loans of MGL factors in a conditional guarantee to be extended by TL to the long term loans undertaken by MGL, which will largely mitigate implementation risks. Moreover, it also reflects strong management and financial support expected from the Torrent Group on an ongoing basis.

These strengths are partially offset by MGL's exposure to long term demand risks, given its modest scale of operations, with its network confined to a single geographical area (GA) of Outer Pune (Pune district, excluding the Pune city metropolitan area), and reliance on price sensitive industrial customers to scale up volumes. Nevertheless, the city gas distribution (CGD) business has a healthy demand outlook, and enjoys regulatory tailwinds such as assured domestic gas allotment for meeting compressed natural gas (CNG) and domestic piped natural gas (PNG) demand.

Analytical Approach

The rating on the short-term bank facilities is based on the unconditional, irrevocable and comprehensive guarantee provided by the parent, TL. CRISIL has applied its holding company criteria for analyzing the credit risk profile of TL. For the long-term loans, CRISIL has applied its parent notch-up criteria to factor in the extent of support expected from TL given the group's strategic foray into the gas distribution business.

Key Rating Drivers & Detailed Description
Strengths:
* Healthy financial flexibility of the parent
CRISIL's rating of 'CRISIL A1+(SO)' on the short-term bank facilities of MGL is based on the strength of the guarantee provided by Torrent Private Limited (TL).

TL's financial flexibility is healthy, supported by the market value of the investments in the consolidated entity in TPharma (71.3% shareholding), and TPL (53.6% shareholding). The market value of TL's consolidated shareholding in these companies was about Rs 25,876 crore, as on July 23, 2019. This is substantial in relation to the non-fund based limits of TGPL guaranteed by TL, and bank limits of MGL to be guaranteed, leading to a healthy market value of investments to liability cover of more than 20 times currently since TL does not have any other external debt liability. Going ahead, CRISIL believes that TL may extend further support to MGL and TGPL in form of equity, which can result in reduction of cover ' nonetheless the cover is expected to remain adequate for the rating category. The investment required to be made by TL in these entities, and any additional CGD licenses contracted by TGPL, would be key sensitivity factors.

The key operating companies have a track record of annual dividend payment, which has stood between Rs 80 crore and Rs 500 crore over past five years through fiscal 2019. Both TPL and TPharma shall endeavor to pay dividend of 30% of consolidated net profits, as per their stated policy. Moreover, both TPL ('CRISIL AA-/Stable/CRISIL A1+') and TPharma have strong credit profiles with healthy operating efficiencies and adequate financial profiles.

* Management and financial support from the Torrent Group
CRISIL's rating on the proposed long term loans factor in the management and funding support from the Torrent group, via TL. MGL is a part of the Torrent Group's venture into the CGD business, in which the group is making substantial investments, with 13 GAs being developed by Torrent Gas Private Limited (TGPL), TLs wholly owned subsidiary. TL has proposed to extend a guarantee to the long term loans undertaken by MGL, which will remain valid at least up to March 31, 2023 and the completion of certain milestones related to its pipeline network, which exceeds the minimum work plan (MWP) as per license awarded to MGL. This guarantee will largely mitigate the implementation risks related to the project.

Although TL holds 49% in MGL currently, it holds an option to acquire balance 51% shareholding by May 2020 as per agreement with current promoters Mahesh Resources. Moreover, TL holds optionally convertible debentures (OCDs), totaling Rs. 125 crore, and has an option for conversion between June 2020 and December 2020, which will result in at least 89% shareholding in MGL.

* Favourable regulatory environment for CGD players
Owing to the clean nature of natural gas compared to most fuel sources, the CGD sector enjoys regulatory tailwinds such as allocation of 100% APM gas as an input for its CNG and domestic PNG business. Moreover, regulations such as grant of infrastructure and marketing exclusivity are favourable for CGD operators. MGL has infrastructure exclusivity for 25 years and marketing exclusivity for a period of 5 years from grant of license in May 2015.

Weaknesses:
* Exposure of TL to market-related risks and to project risks at subsidiaries
CRISIL believes TL will remain susceptible to market-related risks as its financial flexibility, in terms of cover available, will depend on prevailing market conditions and the share prices of TPharma and TPL. Although the relative stability of cash flows from both the power and pharma businesses helps, any increase in systemic risks, leading to a sharp decline in their share prices, will be a key rating sensitivity factor.

Moreover, TL will remain exposed to project risks at its wholly owned subsidiary TGPL, and its investment in MGL, given the early stages of implementation. Any substantial cost or time overruns can result in higher than expected liabilities at TL. 

* Exposure of MGL to long- term demand risks
MGL's ability to ramp up its volumes and profitability across segments (viz. industrial, commercial, transport and domestic) will be key to its credit risk profile in the long term. MGL has a modest scale of operations, with its network confined to a single geographical area (GA) of Outer Pune, which exacerbates the impact of delays in ramping up volumes in a particular segment on the company's overall revenues. Moreover, the industrial segment is expected to comprise a dominant share of revenues for MGL in the first few years. This segment entails lower operating margins compared to other segments such as transportation (CNG), and has price sensitive customers and thus elastic demand, on account of which the company will remain vulnerable to volatility in R-LNG prices.

Nevertheless, CGD business has a healthy demand outlook, given that it is relatively more environmentally friendly compared to most fuels, and it is cost efficient ' which has also resulted in a favourable regulatory environment.

MGL is required to adhere to the Minimum Work Plan (MWP) by May 2020 as per terms of license awarded by PNGRB in May 2015. This entails laying a pipeline network of 1800 inch-km, and reaching a domestic customer base of 52,810 households. Given that about 3 years have already elapsed, timely completion of the MWP will be challenging. Nevertheless, the company is expected to make substantial progress towards it, thus, the probability of invocation of performance bank guarantee (PBG) is low.
Liquidity

Total project cost is estimated to be Rs. 534.45 crore, which shall be funded by Rs. 348.04 crore of debt and balance Rs. 187.41 crore from equity/internal accruals. The company is currently in project phase, and hence is dependent on support from TL, which has strong liquidity profile given its market value of investments to liability cover of more than 20 times.

Outlook: Stable
CRISIL believes that MGL will continue to benefit from strong management and financial support from the Torrent Group.
 
Upside scenario
* Sustainably higher accruals vis-a-vis expectations, driven by quicker ramp-up of distribution network
 
Downside scenario
* Lower than expected ramp up in volumes, especially in the key industrial and transport segments which results in lower accruals
* Material delays in achieving Minimum Work Plan (MWP) 
* Any adverse change in regulations which has a material impact on business profile.
* A deterioration in the credit profile of parent TL

About the company, Mahesh Gas Limited
Mahesh Gas Limited (MGL) was awarded a license to set up and operate a City Gas Distribution (CGD) network in the Pune District (excluding Pune metropolitan region) by the Petroleum and Natural Gas Regulatory Board (PNGRB) in May 2015. The Torrent Group, via TL acquired a 49% stake in MGL from Mahesh Resources Private Ltd in 2018.

About the Guarantor, Torrent Private Limited (TL)
TL is the holding company for the Torrent group, with business interests across Power and Pharmaceuticals. TL held 53.6% of the total shareholding in TPL and 71.3% in TPharma as on March 31, 2018. TL also holds 100% in TGPL

Key Financial Indicators (MGL)
Particulars Unit 2018 2017
Revenue Rs. Cr. 0 0
Profit After Tax (PAT) Rs. Cr. -2.5 -3.2
PAT Margins % NM NM
Interest coverage Times NM NM
Adjusted Debt/Adjusted Networth Times NM NM
NM: Not meaningful

Any other information: Not applicable

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. Cr)		 Rating Assigned
with Outlook
NA Proposed Term Loan NA NA NA 144 CRISIL A/Stable
NA Non fund based limits^ NA NA NA 250 CRISIL A1+(SO)
NA Non fund based limits NA NA NA 15 CRISIL A1+(SO)
^Interchangeable with proposed term loan, which totals to Rs.348.04 crore
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  144.00  CRISIL A/Stable  15-01-19  CRISIL A/Stable  22-10-18  CRISIL A/Stable    --    --  -- 
Non Fund-based Bank Facilities  LT/ST  265.00  CRISIL A1+(SO)  15-01-19  CRISIL A1+(SO)/ Provisional CRISIL A1+(SO)  22-10-18  Provisional CRISIL A1+(SO)    --    --  -- 
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
Non-Fund Based Limit^ 250 CRISIL A1+(SO) Non-Fund Based Limit* 250 CRISIL A1+(SO)
Non-Fund Based Limit 15 CRISIL A1+(SO) Non-Fund Based Limit 15 CRISIL A1+(SO)
Proposed Non Fund based limits 16 Withdrawn Proposed Non Fund based limits 16 Provisional CRISIL A1+(SO)
Proposed Term Loan 144 CRISIL A/Stable Proposed Term Loan 144 CRISIL A/Stable
Total 425 -- Total 425 --
^Interchangeable with proposed term loan, which totals to Rs.348.04 crore
*Interchangeable with proposed term loan, which totals to Rs.394 crore  
Links to related criteria
CRISILs Approach to Financial Ratios
Criteria for rating instruments backed by guarantees
CRISILs Bank Loan Ratings
Understanding CRISILs Ratings and Rating Scales

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