By Bhanu Patni

India Ratings and Research (Ind-Ra) has affirmed IHB Limited’s (formerly IHB Private Limited) Long-Term Issuer Rating at ‘IND A+’. The Outlook is Stable. The instrument-wise rating action is as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Term loan

-

-

March 2034

INR67.25

IND A+/Stable

Affirmed

ANALYTICAL APPROACH:  Ind-Ra continues to factor in strong sponsor support from IHB’s sponsors Indian Oil Corporation Ltd. (IOC; IND AAA’/Stable; holds 50% stake in IHB), Hindustan Petroleum Corporation Ltd (HPCL; IND AAA’/Stable; 25% stake) and Bharat Petroleum Corporation Ltd (BPCL; 25% stake), collectively referred to as oil marketing companies (OMCs), to arrive at the ratings.

The affirmation reflects IHB’s strong operational and strategic linkages with its sponsors, extension allowed by Petroleum and Natural Gas Regulatory Board (PNGRB) for pipeline completion by December 2022, which the management expects to achieve; a comfortable debt service coverage ratio (DSCR),  65% ship-or-pay arrangement by sponsors and complete debt tie-up.


KEY RATING DRIVERS

Strong Sponsor Support: The sponsors share control over IHB’s board of directors in the ratio of their respective shareholding. The chief executive officer is nominated by IOC, and the chief financial officer and chief operating officer, are nominated on rotational basis by HPCL and BPCL. The project would benefit from the experience of all the sponsors in laying and operating pipelines for moving petroleum products, crude, gas and liquefied petroleum gas (LPG). Also, the sponsors have committed to offtake volumes on a ship-or-pay basis to ensure a minimum DSCR) of 1.0x on a year-on-year basis, infuse project equity (INR33.6 billion), arrange financing to fund any cost overrun and maintain an equity holding of 51% through the loan tenor.

Ind-Ra believes IHB provides a business advantage for the sponsors by providing a dedicated facility for moving LPG from their own facilities and import terminals to the consumer market in the parts of western, central and eastern India. The proposed pipeline will connect 22 LPG bottling plants of the OMCs in Gujarat, Madhya Pradesh and Uttar Pradesh. The pipeline also becomes important from the point of cost savings, given bulk of the current demand is being moved by road transport, which is expensive than pipeline transportation.

Liquidity Indicator - Adequate: 
The entire debt portion (INR67.3 billion) of the total project cost of INR100.9 billion has been tied up. As per the loan agreement, 25% of the equity contribution (INR8.4 billion) needs to be infused upfront before the first disbursement of loan. As of September 2021, the total capex of INR22 billion has been incurred, which is funded through INR20.6 billion of equity and INR4 billion of debt (drawn in September 2021). The liquidity is further supported by the sponsors’ undertaking to arrange financing to fund any cost overruns and the maintenance of a minimum DSCR of 1.0x on a year-on-year basis. 

Low Offtake Risk: 
Ind-Ra assesses the offtake risks associated with the pipeline to be low, given the promoters have entered into a ship-or-pay arrangement for ensuring a minimum offtake of 65% of the committed volumes. Additionally, the demand growth seen in LPG, on account of the push by the government, is likely to ensure that the pipeline has adequate capacity utilisation. Coverage of the pipeline across the three states in western, central and eastern parts of India, consisting of a significant portion of domestic LPG connections further highlights the importance of the pipeline. With the growth in LPG demand outpacing domestic production, increased reliance on imported LPG further increases the importance of the pipeline as it would connect to LPG importing facilities at Kandla, Mundra, Dahej and Pipavav, thus lowering offtake risk. During 1HFY22, the share of imported LPG further increased to 58.1% (1HFY21: 57.1%, FY21: 56.2%, FY20: 51.5%) amounting to 7.9 million tonnes of the total LPG consumption. 

Competitive Tariff Mechanism: 
IHB emerged as the sole bidder for the pipeline and the competitive tariff bid out is fixed year-wise for 10 years, post the commissioning of the pipeline. The tariff is subject to review by the PNGRB post 10 years. IHB’s base year tariff of INR3.95/tonnekm is 2.0x higher than LPG pipelines, where PNGRB determines the tariff on 100% train load basis for equivalent rail distance. The tariff for IHB increases at around 5% annually thereafter. The fixed yearly nature of the tariff, coupled with the minimum 65% ship-or-pay obligation, provides an assured income stream for IHB post project completion and also ensures a healthy average DSCR of more than 1.3x. Furthermore, the loan repayment period of 10 years (post one-year moratorium) mitigates risk of any adverse tariff movement after the 10th year on the company’s expected DSCR.

Project Commissioning Timelines Extended: 
As of September 2021, IHB incurred capex of INR22 billion achieving a cumulative physical progress of 43.7%, which is behind schedule as per the initial targets. The delays were due to disruptions caused by COVID-19 pandemic and as per the representation made by the company to PNGRB, the project timeline has been extended by one year to end-December 2022, which according to the management is achievable. Furthermore, there is three-month cushion available as the zero date, as per the loan agreement, has been considered as 1 April 2020 with 36 months construction period, followed by 12 months moratorium and a 10-year loan amortisation period. An accelerated payment clause has been included in the agreement enabling preponement of repayment schedule in case the commercial operations date of the project is achieved before the scheduled commercial operations date of 1 April 2023. The pipeline could also start operations in phases, given its interconnectivity at various points in case approvals for a particular section are delayed. IHB has achieved right of use for around 62% of the total pipeline length.

Despite extension of project timeline, management has informed the agency that there would be minimal cost overrun as majority of purchase orders were placed before the increase in prices of key raw materials, especially steel. The orders carried a non-escalation clause, thereby immunising the project cost. Furthermore, the management has articulated that the project cost has a built in contingency provision of INR3.7 billion and escalation of 3.35% per annum, which provide some cushion to any cost increase. The project has also factored in INR4.7 billion of interest during construction. Additionally, the execution strength of the sponsors and their experience in laying pipelines (IOC: 14,701km, HPCL: 3,775km, BPCL: 3,178km) provide comfort. However, if the project cost increases by 10%, Ind-Ra estimates the average DSCR to remain comfortable at around 1.2x assuming the same debt/equity ratio and 65% offtake.


RATING SENSITIVITIES

Positive: Timely completion of the project and utilisation of the pipeline by the sponsors could be positive for the ratings.

Negative
: Significant debt-funded cost or time overruns, leading to a significant change in the  DSCR could result in a negative rating action. Any weakening of the linkages with the sponsors could also be negative for the ratings.



COMPANY PROFILE

IHB is a joint venture between IOC, HPCL and BPCL for implementation of 2,816km long LPG pipeline from Kandla (Gujarat) to Gorakhpur (Uttar Pradesh) with additional feeder lines of Pipavav-Ahmedabad, Dahej-Koyali and associated branch lines to Bina Refinery and BPCL/HPCL’s bottling plants, with a system capacity of 8.25mt per annum.

 

FINANCIAL SUMMARY 
The financial summary is not available as the project is under construction.


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

28 October 2020

23 September 2019

Issuer rating

Long-term

-

IND A+/Stable

IND A+/Stable

IND A+/Stable

Term loan

Long-term

INR67.25

IND A+/Stable

IND A+/Stable

Provisional IND A+/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

Instrument Type

Complexity Indicator

Term loan

Low

 

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.


SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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For more information, visit www.indiaratings.co.in.

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Analyst Names

  • Primary Analyst

    Bhanu Patni

    Senior Analyst
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    0124 6687276

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121