Detailed Rationale

CRISIL Ratings has upgraded its rating on the bank loan facilities of Torrent Gas Moradabad Limited (TGML) to ‘CRISIL AA-/Positive/CRISIL A1+’ from ‘'CRISIL A/Stable/CRISIL A1’.

 

The rating upgrade factors in 1) strengthening of the credit profile of the holding company Torrent Investments Pvt Ltd (TIPL), driven by an improvement in the credit profile of the operating companies Torrent Pharma Ltd and Torrent Power Ltd (‘CRISIL AA+/Stable/A1+’); and 2) improvement in performance of both Torrent Gas Private Limited (TGPL) and of the Torrent Gas group. 3) Revision in the analytical approach (refer analytical approach section below).

 

For Torrent Gas Group (TGG), fiscal 2021 results exceeded expectations driven by strong performance in Torrent Gas Pune Limited (TGPUL) and TGML. During April to December 2021, revenue and EBITDA for TGG was at Rs 564 Cr and Rs 180 Cr respectively, a significant ramp up from fiscal 2021 full-year revenue and EBITDA of Rs 312 Cr and Rs 89 Cr respectively. The improvement in operating performance was driven by rise in TGPL’s operations and continued healthy performance in TGPUL and TGML. Over the medium term, CRISIL Ratings expects robust revenue growth driven by TGPL, Torrent Gas Chennai Private Limited (TGCPL) and Torrent Gas Jaipur Private Limited (TGJPL) on capex led ramp-up in operations and sustained healthy performance in TGPUL and TGML.

 

Operating performance for TGML improved in fiscal 2022, led by heathy growth in sales. During April to December 2021, revenue and EBITDA for TGML came in at Rs 72 Cr and Rs 33 Cr respectively. This represents a growth of 22% and 23% in revenue and EBITDA respectively over full year of fiscal 2021.

 

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 moderate risk of gas availability and benefits derived from the government's favorable view regarding the city gas distribution (CGD) sector. These strengths are partially offset by susceptibility to market related risks and project-implementation risks.

Analytical Approach

CRISIL Ratings has revised its analytical approach for TGML. The earlier approach was to consider the standalone credit profile of TGML and apply its parent notch-up framework to factor in the support from its parent TGPL.

 

The revised analytical approach combines the business and financial risk profiles of TGPL, TGCPL, TGPUL, TGML, TGJPL, Dholpur CGD Pvt Ltd (DCPL) and Sanwariya Gas Ltd (SGL). These constitute all the SPVs of the Torrent group in the gas business, collectively referred to as the Torrent Gas Group (TGG). This is in-line with CRISIL Ratings’ criteria for rating entities in homogenous groups.

 

The management intends to consolidate/merge some of these SPVs over the medium term, subject to regulatory approvals, in order to minimize the number of SPVs. Moreover, 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, would be available for covering any shortfall across the group.

 

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, parent. The support factors in the strategic importance to TIPL and the strong financial and managerial support provided to it from the parent company. CRISIL has applied its holding company criteria for analyzing the credit risk profile of TIPL. For the calculation of the ratio of market value of investments to debt, CRISIL takes into account the standalone debt, as well as the extent of support expected from TIPL to its subsidiaries.

 

Please refer 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 into the CGD space in 2018 through the acquisition of TGPUL and later won 13 GAs in the 9th and 10th bidding round of PNGRB. Today, it is present into 17 GAs housed across 7 entities with a total area under authorization exceeding 1.25 lac sq. kms. TGG is likely to receive strong financial, operational and managerial support from TIPL, given that CGD is a strategic focus for the group. TIPL has also extended a corporate guarantee (CG) for the project loans, which is valid till at least 9 years, to key project SPVs (TGPL, TGCPL) from the date of disbursement. Besides that, it has also given an unconditional, irrevocable and continuing CG for the interim short term facilities of the SPVs. The high moral obligation to support is also underscored by the shared Torrent brand.

 

TIPL's financial flexibility is robust driven by the market value (MV) of unencumbered investments held in Torrent Pharmaceuticals Ltd (Tpharma; 71.25% shareholding) and Torrent Power Ltd (TPL; 53.56% shareholding). As of February 25, 2022, it stood at around Rs 43,755 crore that is substantial in relation to the fund and non-fund-based limits of TGG that are guaranteed by TIPL, leading to a healthy market value of investments to liability cover, as TIPL does not have any other external debt. Any additional CGD licenses contracted by TGG, the investment required 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 has been over Rs 450 crore during fiscals 2018-2021. Both TPL and Tpharma will endeavor to pay dividend of 40% of the consolidated net profit, as per their stated policy, which should largely suffice for the equity requirement towards TGG. CRISIL Ratings believes that the strong credit profile of these companies and diversity in their businesses will enable steady dividend inflows for TIPL, which should support equity funding for TGG.

 

• Regulation-driven market monopoly:

As per PNGRB’s letter of authorization (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 in tapping the expected growth in the gas sector in the areas. It also gets benefit of favorable demand drivers like high price arbitrage CNG commands over petrol /diesel thus encouraging speedy conversion. Conversely, TGPUL, TGML and SGL’s marketing exclusivity have already expired but they are cushioned against the competition due to inherent entry barriers and TGG’s high operating efficiencies.

 

Nevertheless, the group remains susceptible to threat from EVs over the medium to long-run especially in the CNG segment. To overcome this, it is focused on having equal exposure to sales from the piped natural gas (PNG) segment. Furthermore, the ban imposed by National Green Tribunal (NGT) over usage of dirty fuels has been pushing industries to convert to PNG.

 

• Moderate risk of gas availability led by favorable outlook of the government towards CGD:

The government has given first priority to the CNG-transport and PNG-domestic segment in the domestic gas allocation that aids persuade customers to move towards cleaner and environment-friendly fuel options (over petrol and diesel). In order to meet the requisite demand, it 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 Limited (GIGL) which will help it tide over sudden outage and volatility to spot market. Any change in the gas allocation policy would however be a monitorable.

 

Weaknesses:

• Exposure to market-related risks:

CRISIL Ratings believes TIPL will remain susceptible to market-related risks as its financial flexibility, in terms of availability of the cover, 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 their share prices, will be a key rating sensitivity factor.

 

• Exposure to project risks and inorganic acquisitions in the CGD space:

TGG will remain exposed to project risks at its project-phase subsidiaries, TGPL, TGCPL and TGJPL which are in the initial stage of operation. These entities have budgeted total capital expenditure (capex) of around Rs 6,000-7,000 crore for the initial five years from the date of authorization. Besides, it also remains prone to timely and adequate ramp-up in the operations and profitability of the newly acquired entities DCPL and SGL. Nevertheless, the ramp-up seen in the operations of TGPUL and TGML demonstrates the group’s ability to quickly turn around existing GAs.

Liquidity: Strong

CRISIL Ratings believes TGG is strategically important to the parent, TIPL and hence, will continue to receive strong financial support it. The parent enjoys robust liquidity driven by financial flexibility as reflected in market value of Rs 43,755 crore of unencumbered investments as of February 25, 2022, in operating companies (TPL and Tpharma) with nil external debt. As per CRISIL Ratings estimates, TGG is expected to generate accruals of about Rs 200 crore over the medium term.  Furthermore, the project-phase entities enjoys long tenure for debt servicing i.e. 14 years including 7 years of moratorium that will help allay pressure on cash flows during stabilization phase.    

Outlook: Positive

CRISIL Ratings believes TGG will remain strategically important to TIPL and hence, will continue to receive strong managerial and financial support from the parent over the medium term.

 

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

Rating Sensitivity factors

Upward factors:

• Ramp up in revenue and profitability of TGG and TGML
• Upgrade in the rating of TPL or an improvement in the credit risk profile of Tpharma

 

 

Downward factors

• 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 investments to adjusted debt cover at TIPL
• Decline in revenue and profitability of TGG or TGML

About the Company

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

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, 2021. As of Dec-2021, TIPL has infused around Rs 1,000 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-2033	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-2028	45	NA	CRISIL AA-/Positive

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

***PBG of Rs 80 million, SBLC of Rs 80 million and STL/OD of Rs 10 million as a sub-limit