Press Release Indian Oil-Adani Gas Private Limited

1 1 CARE Ratings Limited Press Release Indian Oil-Adani Gas Private Limited November 28, 2017 Ratings Facilities Amount (Rs. crore) Rating1 Rating Action Long-term Bank Facilities (increased from crore) CARE A-; Stable (Single A Minus; Outlook: Stable) Reaffirmed Short-term Bank Facilities CARE A2+ (A Two plus) Assigned Total facilities (Rupees One Thousand One hundred Eight Six crore and Twenty lacs only) Details of instruments/facilities in Annexure-1 Detailed Rationale& Key Rating Drivers The ratings assigned to the bank facilities of Indian Oil Adani Gas Private Limited (IOAGPL) continue to derive strength from its strong parentage and group support, operational synergies with JV partners in the similar lines of businesses and experienced and professional management team. The rating also factors in the monopolistic nature of IOAGPL s business within the authorized locations for setting up city gas distribution infrastructure, adequate gas sourcing tie-ups and Government of India s (GoI) impetus on promoting natural gas.

2 The rating is, however, constrained by delays in ongoing projects, aggressive capex plans and regulatory risk related to the city gas distribution (CGD) industry. Going forward, the company s ability to complete the capex within budgeted cost and timelines, achieve envisaged gas sales volume and pass on hike in gas prices in order to maintain its profitability would remain the key rating sensitivities. Further, any change in the funding pattern for future capex would also remain key rating sensitivity. Detailed description of the key rating drivers Key Rating Strengths Strong parentage and group support IOAGPL is a joint venture between Indian Oil Corporation Limited (IOCL) and Adani Gas Ltd (AGL, rated CARE A1+ ). IOCL is a Maharatna PSU and the largest oil refining and marketing PSU of India. IOCL, along with its subsidiaries, owns and operates 11 refineries in India with refining capacity of million metric tonnes per annum (MMTPA).

3 In the marketing and distribution segment, it has a strong network of crude oil, product and gas pipelines of 12800 km and of 45,000 customer touch-points. IOCL also has presence in the upstream vertical with participating interest in 8 domestic and 7 overseas blocks. In the natural gas sector, IOCL is a co-promoter of Petronet LNG Limited (PLL) with stake, which has set up LNG import terminals at Dahej and Kochi. During FY17, IOCL reported PAT of crore on operating income of ,873 crore. Adani Gas Ltd (AGL), a subsidiary of Adani Enterprises Ltd (AEL, rated CARE A; Stable/CARE A+ (SO); Stable/ CARE A1), was incorporated in 2005. AGL is in CGD business & supplies PNG and CNG in Ahmedabad & Vadodara (Gujarat), Faridabad (Haryana) and Khurja (UP). During FY17, AGL reported PAT of crore on operating income of ,082 crore. 1 Complete definitions of the ratings assigned are available at and in other CARE publications.

4 2 CARE Ratings Limited Press Release Proven record of JV Partners in similar line of business leading to operational synergies Both the JV Partners: IOCL & AGL have proven track record of operations in the similar line of business. Thus IOAGPL is expected to benefit from the project execution as well as the operational skill sets of its JV partners. IOCL took up natural gas marketing in 2004 and has developed expertise in the domain which is expected to provide a various operational synergies to IOAGPL. CGD: IOCL is already operating CGD networks in Agra and Lucknow through Green Gas Ltd., its joint venture with GAIL (India) Ltd. Gas sourcing: IOCL is co-promoter of Petronet LNG Ltd. (PLL), which has set up LNG (Liquefied Natural Gas) import terminals at Dahej& Kochi. This is expected to provide IOAGPL comfort in terms of sourcing of R-LNG for its PNG customers. IOCL is also in the process of setting up 5-MMTPA LNG terminal at Ennore near Chennai in a JV company viz Indian Oil LNG Private Ltd (rated CARE AAA (SO); Stable/CARE A-; Stable) to meet the increasing domestic requirements.

5 Co-location benefits: IOCL has a wide distribution network of petroleum products. In order to take the advantage of IOCL s existing retail outlet network, IOAGPL is establishing its CNG stations on co-location basis in the existing retail outlets of IOCL. This would save land cost and also reduce the gestation period to set up the station. Likewise, AGL is an established CGD player and has been operating in the cities of Ahmedabad, Vadodara, Faridabad and Khurja (UP). IOAGPL is expected to benefit from the managerial and operational expertise of AGL which has already established itself in its authorized cities. Furthermore, AGL s experience of sourcing gas for its CGD business from various gas sources would also help IOAGLP in sourcing its gas requirements. Experienced and Professional management team The company is being managed by professional and experienced management team, which is knowledgeable with respect to various aspects of the gas industry in India.

6 Mr. Ravi Kant Sethi, Chairman of IOAGPL is a Chartered Accountant with over 30 years of experience in IOCL. He is presently heading the Project Appraisal and taxation function at IOCL and has vast experience in various activities of finance, audit and ERP implementation. Mr. Rajeev Sharma, Director is an Engineer with over 30 years of experience in Oil & Gas industry both in India & Abroad. He is currently managing all the project related aspects of IOAGPL. He was instrumental in the formation of Indraprastha Gas Limited (IGL, rated CARE AAA ) at New Delhi and was also the founder MD of IGL. He has vast experience in the development, planning, and Execution of gas projects especially pipelines and CGD. Government impetus on promoting Natural Gas With increasing impetus coming in the form of environmental concerns, CNG and CGD projects have become a priority segment of natural gas business. Further, there has been increase in the number of CNG operated vehicles on account of the pricing economics of natural gas compared with other conventional fuels.

7 The domestic gas consumption being currently at a very nascent stage presents a huge opportunity for CGD companies. As per MoP&NG s guideline issued in August, 2014, CNG and PNG (domestic) gas requirements of CGD players are to be fully sourced from GAIL under the APM mechanism. The guideline of moving the CGD requirement for these two segments on the top of the gas allocation list has provided assurance of availability of gas to the CGD players in the country which also lead to positive prospects for the CGD industry. As per new pricing formula, prices of gas under APM is revised on a half yearly basis whereby there has been consistent decline since announcement of price for the first time for the period November 01, 2014 to March 31, 2015 at USD / mmbtu (on GCV basis) to now USD / mmbtu (on GCV basis) for the period April 01, 2017 to September 30, 2017. Any adverse regulatory changes on this front can affect the profitability of CGD companies directly.

8 3 CARE Ratings Limited Press Release Monopolistic position in CNG in authorized cities given the entry barriers As per the guidelines of the Petroleum and Natural Gas Regulatory Board (PNGRB), IOAGPL has market exclusivity right of 5 years from the date of receiving authorization, which will lead to monopolistic position of IOAGPL in its various Geographical Areas (GAs). Furthermore, it will also have Network exclusivity as city gas carrier till next 25 years from the date of authorization. As on September 30, 2017, IOAGPL has received authorization for CGD business in seven cities as follows: Cities Authorization Marketing Exclusivity Infrastructure Exclusivity Chandigarh 8-May-13 7-May-18 7-May-38 Allahabad 8-May-13 7-May-18 7-May-38 Ernakulum 14-Oct-15 13-Oct-20 13-Oct-40 Daman 1-Apr-15 31-Mar-20 31-Mar-40 Panipat 1-Apr-15 31-Mar-20 31-Mar-40 Dharwad 14-Sep-15 13-Sep-20 13-Sep-40 Udham Singh Nagar 28-Jul-15 27-Jul-20 27-Jul-40 Given the large capex requirement and gestation period with respect to creation of infrastructure for a CGD business, there exist significant entry barriers and thus IOAGPL is expected to continue its monopolistic position in the authorized cities even after expiry of the marketing exclusivity.

9 Adequate gas sourcing tie-ups MoP&NG, Government of India has emphasized on usage of natural gas in the country and thus been providing APM gas to the maximum extent to the CGD players. In continuation to this agenda, MoP&NG issued revised guideline in August 2014 towards the allocation of APM gas. As per the guideline, GAIL would provide 100% requirement of CNG and PNG (domestic) to individual CGD players under the APM mechanism. The allocation would be revised every six months based on actual usage. Thus, IOAGPL has adequate gas sourcing with respect to CNG and PNG (Domestic) by way of APM gas. For remaining two segments viz. PNG: Industrial and Commercial, the company has tied-up with GAIL. Furthermore, both the JV partners are existing players in gas business in the country having independent experience of sourcing gas from various available sources in India and abroad. IOCL has equity stake and 30% marketing rights of natural gas in the RLNG terminal at Dahej of Petronet LNG Ltd, which can be made available for various CGD projects.

10 AGL, currently running CGD business in Ahmadabad, Faridabad & Vadodara, has experience of sourcing gas from GSPC, GSPC-NIKO, etc. It has the experience of efficiently sourcing and managing the portfolio of gas. Key weaknesses Aggressive capex plans IOAGPL is establishing its CGD business in seven cities in the country for which it has received authorizations. Out of total pipeline of 6,453 km to be laid in these cities, the Company has laid approximately 3,332 km (~52%) of pipeline till September 30, 2017. There has been significant time gap between the date of receipt of authorization from PNGRB and the actual COD/commencement. Moreover, even in the existing operational GAs, the company has commenced partial operations. This is due to the fact that the company has been facing delays in obtaining approvals for right of use and other clearances to be granted by various municipal and central authorities.