The document provides an overview of ICRA's rating methodology for assessing the credit quality of city gas distribution companies in India. ICRA analyzes business risk drivers like the scale of operations and demand potential in a company's geographical area. Industry risk drivers include gas price and availability risk and regulatory risks. Financial risk drivers include profitability, leverage, and cash flows. ICRA evaluates these factors and the management quality to determine a company's credit rating. The methodology remains materially similar to ICRA's prior approach, with some minor modifications.

1. ICRA Rating Feature
Rating Methodology for City Gas Distribution Companies
Overview
This rating methodology describes ICRA’s approach to assess the credit quality of the entities in the city gas
distribution sector and supersedes its earlier methodology note on the sector, published in December 2016.
While this revised version incorporates a few modifications, ICRA's overall approach towards rating entities
in the sector remains materially similar.
City Gas Distribution (CGD) companies provide piped natural gas (PNG) to commercial and industrial
establishments for heating and power generation purposes and to households for cooking and heating
purposes. CGD companies also retail compressed natural gas (CNG) for use as auto fuel. A CGD company
may have operations like selling PNG and CNG in more than one geographical area (GA).
Industry structure
According to Petroleum and Natural Gas Regulatory Board (PNGRB) data as on March 2019, CGD
companies in India distribute about ~27 million standard cubic metres per day (MMSCMD) of natural gas to
various consumer segments. The same witnessed a growing trend over the last few years, supported by
multiple factors like India’s energy deficit, favourable cost economics, highest priority allocation of domestic
natural gas by the Government of India (GoI) to PNG (domestic)/CNG consumers and the increasing
availability of imported natural gas. As of March 2019, domestic gas forms about 42% of the consumption,
while imported gas forms about 58% of the consumption. Over the next few years, the sector is expected to
see significant growth in investments as well as sales volumes on the back of new authorisations to entities
to operate in new areas.
For distribution of PNG to consumers, CGD companies set up a network of steel and medium density
polyethylene pipelines across its GAs and transport the gas from their city gas station (where the gas is
received from the supplier) to the consumer; for retailing CNG, companies set up dispensers either at their
own exclusive stations or at the fuel pumps of oil marketing companies (OMCs). As large upfront capex and
multiple regulatory approvals are required for setting up the pipeline network and CNG stations, the credit
risk profile of CGD companies depends on the expected demand growth, size of capex, means of funding,
status of approvals and the stage of operations, among other factors.
In 2007, the GoI set up a regulator, the Petroleum and Natural Gas Regulatory Board (PNGRB), which has,
among other mandates in the hydrocarbon sector, the mandate of regulating the CGD business. The PNGRB
invites bids for different GAs and nine such rounds have been conducted till date1
. However, the
attractiveness of a particular GA is dependent upon the availability of pipeline connectivity with trunk
pipelines, the potential for gas sales and the mix of industrial, commercial, domestic and CNG segments.
The domestic and CNG segments have been more profitable in the last three to four years, while the PNG
industrial and commercial segments have lower profitability. Additionally, aggressive bidding by companies
may make these vulnerable to competition from third-party marketers once the exclusivity period (currently
eight years) is over. Accordingly, the credit risk profile of a CGD entity depends upon the current gas
consumption, demand growth potential in its GA, the user mix, gas tie-ups with suppliers and the bid
parameters.
In the initial years, the regulatory mandate (such as mandatory conversion of public transport into CNG) was
the real demand driver for CGD business growth; however, subsequently the improved cost economics of
gas vis-à-vis alternate fuels spurred the demand growth of the former. In February 2014, the GoI mandated
the highest priority for the provision of domestic gas for the consumption of the CNG and PNG (domestic)
1 Round 1 invited bids from participants in 2009, while the most recent – Round 9 had invited bids in 2018
RATING
METHODOLOGY
May
2019

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segments. The domestic gas being cheaper than imported re-gassified liquid natural gas (RLNG) made the
economics of switching to gas more attractive for the end consumers. On the other hand, the gas demand
from the commercial and industrial segments continues to be met currently by the relatively costlier RLNG,
wherein the economics of using gas vis-à-vis alternate fuels varies with the type of the competing fuel. Hence,
the assessment of the credit risk profile of CGD companies also involves a study of the volume growth and
the average gross margins achievable, which in turn is a function of the price competitiveness relative to
alternate fuels and the company’s ability to tie-up gas at a competitive rate.
Rating Methodology
This rating methodology aims to help entities, investors and other interested market participants understand
ICRA’s approach in analysing quantitative and qualitative risk characteristics that are likely to affect the
ratings of CGD entities. This methodology does not include an exhaustive treatment of all the factors reflected
in the ratings, but it enables the reader to understand the rating considerations that are usually the most
important.
ICRA’s risk analysis framework for the CGD entities can be broadly divided into the following factors –
Business Risk Drivers
• Scale of operations and overall demand potential of the GA
• Consumer mix
• Project risks on newly authorised geographical areas
o Gas pipeline connectivity risk
o Statutory approval and execution risks
o Risk of PBG encashment for slippage in execution of Minimum Work Programme (MWP)
• Extent of competition from third-party marketers
Industry Risk Drivers
• Gas price and availability risk
• Margin risk resulting from changes in cost economics vs alternate fuels
• Regulatory risk
o Authorisation risk
o Network tariff determination for third parties
o Taxation by states
• Performance risks associated with recently awarded authorisations
• Long payback period and limited marketing exclusivity period exposes companies to third-party
competition
Financial Risk Drivers
• Operating profitability and return on capital employed
• Gearing
• Leveraging and debt service coverage ratios
• Working capital intensity
• Cash flows and liquidity
• Foreign currency-related risks
• Tenure mismatches, and risks relating to interest rates and refinancing
• Accounting quality
• Contingent liabilities/off-balance sheet exposures
• Financial flexibility
Management Quality and Corporate Governance
Parentage

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Business Risk Profile
Scale of operations and overall demand potential of GA
Every GA may have some uniqueness in terms of demand potential/growth drivers for natural gas demand.
The returns from the GA for a CGD company needs to be ascertained from its current and potential scale of
operations or gas volumes. The other factors that need to be considered include the distance travelled by
the average commuter, population density, and supporting infrastructure in the GA. The initial cost of setting
up the pipeline network and other infrastructure may make the project economics un-remunerative in case
the market potential is low. Additionally, many cities being bid for do not have many multi-storey buildings as
is the case with big cities which pushes up the cost of providing PNG (domestic) connections. Also, in
comparison to the bigger cities, the distances travelled by commuters are shorter in the smaller ones, which
implies that CNG volumes per vehicle per day are low. These factors impact the viability and returns of rolling
out CGD networks in smaller towns. Even as setting up a CGD network is a capital-intensive activity, scale-
up of volumes remains slow and even a reasonable level of 50-60% customer penetration level is achieved
only after nine to 10 years after the start of operations in most cities. Thus, the entities operating in cities with
higher population density, higher industrial and commercial activity and overall higher economic growth will
tend to have higher demand potential over the long run. The demand potential of the GA will determine the
scale of operations any CGD player can achieve in the long run and the scale economies will result in healthy
returns. A company operating in multiple GAs will also have more diversification in revenue stream and be
able to build a higher scale of operations. Entities operating in smaller cities or with lower industrial activity
are likely to achieve lower gas volumes and thus lower returns in the long run.
Consumer mix
The credit risk profile of a CGD entity also depends upon the gas consumption mix. As domestic gas
allocation is provided by the GoI for the CNG and PNG (domestic) segments, which is generally cheaper
than imported natural gas, these segments tend to be more profitable for CGD players. As long as this
allocation continues, entities having a higher proportion of sales than two segments would tend to have better
pricing power and thus higher average gross margins. Entities that have higher PNG (industrial)
concentration in their sales volumes are likely to be less profitable on account of the strong competitive
pricing pressure from alternate liquid fuels and coal. While the PNG (industrial) segment is the least profitable
segment, the volume per customer is very high. The PNG (commercial) segment offers the benefits of greater
pricing flexibility and lower customer management efforts (compared to PNG (domestic) as individual
volumes are higher here). However, the overall volumes remain too small for all entities to have any material
impact on the overall performance of the same. From the industrial and commercial customers’ perspective,
the use of gas offers various benefits like cost savings, environment friendliness (gas being a cleaner fuel),
higher efficiency, low maintenance costs and operational convenience. The industrial consumers act as
anchor customers for CGD companies and provide large volumes in the initial years even as the PNG
(domestic) and CNG segments require several years to build commercially viable volumes.
Project risks
ICRA assesses the project risk of a CGD operator on the basis of the experience of the management and
the past track record of execution. Entities that have newly entered into the CGD business would have higher
project execution and performance risks. The key project risks emanate from the below factors.
a) Gas pipeline connectivity risk
Availability of gas is crucial to the operations of the CGD companies as there have been several instances
in the past where connectivity with the national grid or trunk pipeline has been delayed by months or years
compared to the initial estimates. Delay in connectivity in turn leads to delays in commencement of the
project, leading to weak economics and cash flow mismatch. For grid/trunk pipeline connectivity, a CGD
company has to depend on the trunk pipeline owner, who may have several competing projects to execute.
Further, the bargaining power of the CGD entity with the trunk pipeline owner remains limited, given the much
bigger size of the latter. This apart, even after the pipeline project commences, laying of new pipelines might
get delayed because of several reasons including delays in securing right of use (ROU), delays in approvals,
local activism, etc.
b) Statutory approval and execution risks
The implementation and operation of a CGD network requires approvals from a number of agencies, such
as the National Highways Authority of India, municipal corporations, public works departments and pollution
control board. Obtaining multiple approvals from various civic and Governmental agencies and authorities
calls for extensive liaison work, besides time, and may stretch the manpower resources of smaller
companies. Moreover, local administration and state governments play a crucial role in facilitating statutory
approvals from various agencies. At times, it is the state development authority that allots land for CNG
stations at heavy vehicular traffic areas of cities. The state pollution control board encourages the industry to

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switch from cheaper but polluting fuels like coal to natural gas and the regional transport authority mandates
conversion of public transport vehicles to CNG. However, these initiatives require strong political will and
administrative machinery to implement, and if lacking could well delay a CGD player’s project
commencement or break-even achievement. Moreover, project economics need to factor in the volatility and
escalation in the prices of steel and other commodities, given the long construction and project execution
time (typically three to five years) that a CGD project typically requires.
c) Risk of PBG encashment for slippage in execution of MWP
Some of the incumbent CGD companies have been participating in the bids for gas distribution projects in
the new GAs as part of their pan-India growth strategy. While entering the new GAs could lower their
geographical-concentration risk, the same could translate into higher credit risks, given the several
challenges posed by the new GAs (as discussed earlier). The impact on their credit profiles would be a
function of the potential of its GA, consumption mix, size of capital expenditure, means of finance and bid
parameters, in relation to the existing operations. Also, in certain rounds, the entities have submitted
performance bank guarantees of high values to the PNGRB. In case there is a slippage in execution
compared to the MWP, PNGRB could encash the PBG, thereby increasing the project cost and impacting
the overall project returns for the players. The progress made with respect to MWP is continuously monitored
by ICRA and the companies which meet or exceed their targets are viewed favourably.
Extent of competition from third-party marketers
The CGD companies have marketing exclusivity for the first five to eight years (depending on when and in
which round the GA was awarded), post which they are prone to competition from third-party marketers. Post
marketing exclusivity period, a third-party marketer can pay the authorised CGD company the pre-determined
network transportation charges and market natural gas to the consumers in the GA. While the marketing
exclusivity period has ended for many GAs in the last four to five years or more, the third-party marketers
have not entered into gas marketing activities till date. Going forward, as gas supply improves, especially for
attractive GAs, the authorised companies will be exposed to the risk of competition from third-party
marketers. The authorised company will have the advantage of not having to bear the additional
transportation charges (since it owns the network), giving it a price advantage equivalent to the transportation
charges. As a result, this risk will especially be high for GAs won under Bid Rounds 4-6, wherein most of the
GAs were won by bidding nearly nil transportation charges. The risk can be assessed upon considering the
number of years remaining for completion of marketing exclusivity and in case of GAs with already completed
marketing exclusivity, on the basis of the attractiveness of the GA and the past track record of third-party
interest towards gas marketing in that GA.
Industry Risk Drivers
Gas price and availability risk
Domestic gas production in India is less than ~90 mmscmd, while the actual consumption is over ~140
mmscmd and the significant unmet demand makes the potential demand even higher. Imported gas supply
bridges the gap. Going forward, the demand for gas is expected to go up and thus the ability of entities to tie-
up gas supply will be crucial for their uninterrupted operations. This in turn is dependent on the increase in
the domestic gas production as well as the regassification capacity for imports.
Since February 2014, the GoI has mandated provision of domestic gas for the consumption of the CNG and
the PNG (domestic) segments. Provision of the same, solely for the consumption of these segments, has
made the economics (on account of its cheaper rate) of switching to gas more attractive for the end
consumers in these segments. This in turn has driven growth in consumption. Any changes to the domestic
gas allocation policy that results in supply reduction to the CGD sector would be a monitorable and will be a
key risk for the sector’s profitability and viability. If domestic gas supply is insufficient to meet the demand
from the CGD sector, it could lead to cuts in allocation to entities, which shall negatively impact their cost
economics against competing fuels as their gas sourcing cost would increase. Further, the pricing of domestic
gas is currently determined by the Rangarajan formula and remains relatively softer than spot gas import
prices. Any changes to the pricing policy and its impact on economics is also a risk.
Margin risk resulting from changes in cost economics vs alternate fuels
Gas demand of the PNG (commercial) and PNG (industrial) segment continues to be met by the costlier R-
LNG and the profitability of both segments remains under pressure to maintain the competitiveness against
LPG and liquid industrial fuels/coal, respectively. Even in the case of the CNG segment (though it is cheaper
in terms of economics), there is strong competition from other auto fuels due to the easier availability and
other qualitative factors, resulting in muted volume growth. Conversion to gas and accordingly the volume
growth remains dependent on the cost economics and convenience of use of gas vis-à-vis alternate fuels.
Thus, if the pricing of gas compared to competing fuels is not economically viable to users, it can result in a
decline in demand and the overall prospects of players in the CGD industry.

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Regulatory risks
Authorisation risk
The entities are exposed to regulatory risks, which can emanate in the form of authorisation of their
operations. While most of the PSU CGD companies have obtained authorisation from PNGRB as these were
approved by MoPNG before the PNGRB Act (2009) came into being, authorisation is awaited for a few cities
as there are multiple operators in those cities. As the PNGRB Act envisages a single entity which will provide
network access for each city, the regulator has to decide how multiple operators will be accommodated. The
companies whose presence is deemed unauthorised, run the risk of stranded investments.
Network tariff determination for third parties
As regards the network/compression tariff, as per PNGRB Act, the same had to be approved by the regulator
following a tariff petition by the CGD concerned, which should include multi-year forecasts of cash flows (until
the end of balance license period). This is only applicable to authorisations awarded by PNGRB prior to Bid
round 4 (for entities that received authorisation after Bid round 4, network tariff for each year is decided at
the bid stage itself). The CGD companies can fix tariffs freely for their end consumers and there would be no
regulation of PNGRB on the network/compression tariffs for the CGD companies having a captive network.
However, PNGRBs would approve the determination of tariffs for third parties selling gas to their end
customers using the CGD companies’ network. The regulator could adopt different assumptions on capex,
opex and volumes for forecasts, which could end up resulting in lower tariff than petitioned for by the CGD
companies.
Taxation by states
The competitiveness that CNG and PNG enjoy over substitute fuels also derives from the supportive taxation
structure that these fuels enjoy in most states. However, as these fuels gain popularity, there is no certainty
that the state governments will not see that as an opportunity to earn additional tax revenues as has been
the case with liquid transportation fuels such as motor spirit, high-speed diesel and aviation turbine fuel.
Already, some states like Gujarat are levying high tax on CNG and PNG, impacting the competitiveness of
these fuels vis-à-vis substitutes. If natural gas in brought under the GST regime, this risk would reduce for
players operating in states with high VAT rates.
Performance risks associated with recently awarded authorisations
According to the PNGRB regulations, the award of CGD networks for new areas has to be done through a
competitive bidding process. Under this, along with technical and financial parameters, the bidders are
evaluated against a specific set of criteria. The CGD regulation was revised by PNGRB in April 2018 and the
revised bidding criteria therein are as listed below:
In the earlier bid rounds, several of the bidders made aggressive bids, with reference to network and
compression tariff (at nearly nil rates) as these were the only two parameters in the bidding criteria earlier.
The strategy of quoting low tariff could expose the aggressive bidders to competition once the marketing
exclusivity period is over; any third-party marketer could use the network of the successful bidder at a nominal
cost and sell gas to the current or the new customers in the region. The revised bidding criteria applicable
since Round 9 have set floor rates for the transportation rates to prevent unreasonable bidding. Also, these
revised criteria emphasise on a shift in focus towards expansion of PNG pipeline and CNG network to ensure
better coverage.
As per the earlier bidding criteria, in case of a tie in tariff bid by players, the winner was selected based on
the value of the bid bond submitted; a higher bid bond was the secondary bidding criteria). Due to the high
competition for some GAs, the performance bank guarantees (PBG) bid by the CGD companies were
significantly high in some rounds (Rounds 4-6). While the willingness to submit a large guarantee indicates
the higher commitment of the players to carry out operations, this also impacts the players by way of
guarantee charges and margin money for facilities. A high quantum of PBG also exposes the bid winners to
a significant contingent liability in case of any delay/default on the MWP and the inability to meet the service
Bidding Criteria Weightage
Lowness of transportation rate for CGD (for each year during the network exclusivity) 10%
Lowness of the compression charge for CNG (for each year during the network
exclusivity)
10%
Highness of the number of CNG stations to be installed within eight contract years
from the date of authorisation
20%
Highness of number of domestic piped natural gas connections to be achieved within
eight contract years from the date of authorisation
50%
Highness of inch-kilometre of steel pipeline (including sub-transmission steel pipelines)
to be laid within eight contract years from the date of authorisation
10%

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standards. In the worst-case scenario of the guarantees being fully or partially encashed for non-fulfilment of
MWP and/or service standards, the same amount in effect would add to the project cost for setting up the
network in a particular GA, which could affect the project’s viability.
This issue has been resolved to some extent in the revised bidding criteria notified in April 2018 in which the
PNGRB linked the amount of PBG to be submitted by the CGD companies to the population of the GA with
the maximum PBG to be submitted has been capped at Rs. 50 crore per GA. Also, PNGRB has prescribed
an annual MWP for the bid winners to achieve in terms of laying of steel pipeline, setting up of CNG stations
and providing PNG (domestic) connections in each of the eight MWP years. At the end of every year, as per
the April 2018 regulations, PNGRB could encash the value of the PBG equivalent to the pre-decided penalty
for under-achievement in each of the first eight years of implementation, which could impact the liquidity
profile of the company at the time. Further, the company would also be required to immediately replenish the
PBG for the amount encashed by PNGRB.
The new regulations also mention that the authorised entity is required to reach and create CGD
infrastructure uniformly in the authorised GA. However, CGD players may target only lucrative areas within
the GAs authorised and may not adequately cover other areas within the GA. ICRA believes that as per the
new regulations, as of now, there is no clear penalty indicated by the PNGRB for non-adherence and only
the numbers under MWP have to be achieved by the entity. In the future, this may be a potential risk for
players opting to be selective in creation of CGD infrastructure in their authorised GA.
Long payback period and limited marketing exclusivity period exposes companies to third-party
competition
It usually takes about two years for a CGD company to develop the infrastructure, including among others,
the pipeline network, a city gas station, and CNG stations before commencing operations. PNG (domestic)
has low profit margins as lack of competitiveness vis-à-vis subsidised LPG (domestic) limits the ability of the
CGD companies to increase the prices of PNG (domestic) beyond a certain level. Additionally, the fixed costs
incurred for the extensive network to be established in residential areas has a long payback period due to
the low billing per household and low conversions in the initial years, even though part of the fixed costs are
recovered as deposits. After the start of operations, sales scale-up is typically slow and it takes three to four
years to reach a commercially viable level. The slower scale-up of sales and the large upfront capital outlays
also mean the payback period of a CGD project is six to seven years.
Under the PNGRB Act, 2006 and the earlier CGD regulations, new entrants/incumbents enjoyed monopoly
with regards to network provision for 25 years and marketing exclusivity for five years, both from the date of
authorisation. Although the marketing exclusivity was for five years, the actual operating period works out to
be much shorter (as the network construction itself takes two to three years). The amended CGD regulations
of April 2018 (applicable only to authorisations awarded prospectively) addressed this issue and increased
the marketing exclusivity period to eight years with a provision to further increase it by two years if the bid
target for each of the eight years is achieved successfully. This increased marketing exclusivity period will
provide more time for the CGD companies to recover the costs and build up a loyal customer base. Post the
marketing exclusivity period, however, there will exist the risk that the CGD company’s customers and several
untapped consumers would migrate to a different gas provider. The impact of such a switchover would be
higher for CGD companies that bid zero or very low network tariff rates, which would allow any third-party
marketer to sell the gas by paying negligible network tariff. However, this risk is partly mitigated by constraints
over the infrastructure availability like pumping station capacity (at the point of gas inflow into the GA) and
pipeline capacity, operational issues related to retail management set-up/expertise (billing, collection and
metering along with after-sales/repair related services), regulatory issues related to lack of regulations by
PNGRB over the estimation of excess capacity available for marketing and unattractiveness of returns,
particularly in case of low sales volume for PNG (domestic). However, the PNG segment, particularly
industrial/commercial, with its large volumes and lower operational issues due to the bulk customer
management could be open to competition post marketing exclusivity, especially if gas availability was to
improve significantly.
Financial Risk Profile
To assess the rated entity’s current financial position, past and projected trends in profitability, gearing,
coverage and liquidity are also analysed. These are discussed below:
Gross margin and return on capital employed
The analysis here focuses on determining the trend in the entity’s operating profitability and how these
compare versus the peers in other cities. Barring a few exceptions, the incumbents have demonstrated the
ability to pass on the increase in gas costs to consumers, albeit with some time lag. Accordingly, while

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analysing CGD companies, a key metric to analyse is the gross margin (gas sale price - gas purchase price)
on a per scm basis. CGD companies strive to maintain the gross margin on a per scm basis even though the
operating profitability may decline due to higher base effect (on account of the increase in gas cost). Besides
gross margin on an overall blended basis, the same is analysed on a segmental (PNG, CNG) basis with the
objective to detect any pressures on profitability in any of these segments due to the resistance of consumers
to price pass through. Further, the return on capital employed (RoCE) needs to be analysed to measure the
efficiency with which an entity utilises the capital deployed in its business. An entity’s ability to consistently
generate RoCE over and above its cost of capital reflects well on its long-term business viability.
Leveraging and debt coverage ratios
A CGD project entails large upfront capex, besides which the CGD entities incur large capex on a regular
basis to expand network and grow sales. Accordingly, the objective here is to ascertain the level of OPBDITA
in comparison to the overall debt levels, i.e total debt/OPBDITA. A long maturity and structured repayment
profile with ballooning of payments, given the gradual scale up of volumes, can partially offset the risk
associated with high financial leverage, as the payback period for CGD business can be long. For higher
rated CGD companies, inter-alia, ICRA expects these companies to have low financial leverage to offset the
high business risk associated with slow build-up in volumes or delays in commencement of operations due
to execution risk/regulatory risk.
Also, the key debt service coverage ratios like interest coverage, debt service coverage ratio and net cash
accruals/total debt are examined to understand the level of cushion the company has to ensure timely debt
servicing.
Liquidity and financial flexibility
As CGD companies incur a large capex on a regular basis with the benefits accruing from the same with a
lag of a few years, the cash flows are analysed for the upcoming capex requirements and the term loan
repayments. The liquidity ratios measure the buffer, which an entity has in the form of cash or cash
equivalents with respect to its obligations that can be utilised in case of any temporary cash flow mismatch.
The existence of adequate buffers of liquid assets/bank lines to meet short-term obligations is viewed
positively. In addition, ICRA notes that an entity with strong liquidity can mitigate the impact of any short-term
exigencies or events that might adversely impact cash flows in the interim. The entity’s liquidity and financial
flexibility is assessed by its unutilised bank/credit limits, liquid investments, and the nature of its relationship
with banks, financial institutions and other intermediaries, strategic importance of the entity to the Group to
which it belongs, along with the financial strength of the Group entities.
Foreign currency-related risks
For imported gas requirements, the CGD companies are dependent on companies that import gas and
provide re-gasification services. Typically, such importers have back-to-back foreign currency-based pricing
arrangements with their suppliers. Hence, the pricing charged from domestic users like CGD companies is
also dollar denominated. However, the payment made by the CGD companies is in rupees and as a result,
forward cover is not generally taken by these. Domestic gas supply is also dollar denominated and the CGD
entities experience an increase in rupee cost if the rupee depreciates against the dollar. Thus, CGD entities
face the risk of passing on these foreign exchange fluctuations to their consumers. Generally, the CGD
companies have back-to-back foreign currency pass through clauses in contracts with large commercial and
industrial consumers. For all other PNG(industrial), PNG(commercial), PNG (domestic), CNG consumers,
the impact of depreciation in rupee vis-à-vis the dollar is passed through periodic price increases. Thus, the
ability to take frequent price changes remains crucial. Additionally, for any imports (of compressors, etc.) the
CGD company may avail buyer’s credit for which the hedging policy is assessed.
Tenure mismatches and risks relating to interest rates and refinancing
Large dependence on short-term borrowings to fund-long term investments can expose an issuer to
significant re-financing risks, especially during periods of tight liquidity. The existence of adequate buffers of
liquid assets/bank lines to meet short-term obligations is viewed positively. Similarly, the extent to which an
issuer would be impacted by movements in interest rates is also evaluated.
Accounting quality
Here, the accounting policies, notes to accounts and auditor’s comments are reviewed. Any deviation from
the generally accepted accounting practices is noted, and the financial statements of the issuer are adjusted
to reflect the impact of such deviations.
Contingent liabilities/off-balance sheet exposures
ICRA evaluates the likelihood of devolvement of contingent liabilities/off-balance sheet exposures and the
financial implications of the same.

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Management Quality
All debt ratings necessarily incorporate an assessment of the quality of the rated entity’s management. An
entity with an experienced management and independent directors on its board are considered positive
factors. An entity should practice sound corporate governance policies to serve the interest of all
stakeholders. The management risk analysis also factors in the historical track record of the entity or Group
in timely servicing its obligations. Any delay or default history in the repayment of principal or interest
payments reduce the comfort level for the rated entity’s future debt servicing capability and willingness.
Nevertheless, ICRA appropriately analyses the reason behind past defaults, which could also be due to the
adverse demand situations in the underlying industry.
In addition, the rated entity’s likely cash outflows arising from the possible need to support other Group
entities are of importance, in case the rated entity is among the stronger entities within the Group. Usually, a
detailed discussion is held with the management of the rated entity to understand its business objectives,
plans and strategies, and views on past performance, besides the outlook on the rated entity’s industry.
Some of the other points assessed are:
• Experience of the promoter/management in the line of business concerned
• Commitment of the promoter/management to the line of business concerned
• Attitude of the promoter/management to risk taking and containment
• The entity’s policies on leveraging, interest risks and currency risks
• The entity’s plans on new projects, acquisitions, expansion, etc.
Parentage
Apart from the standalone credit considerations, the likelihood of extraordinary support coming in from the
parent to an entity or the support that an entity is likely to extend to the other Group companies is factored in
while assessing the credit profile of the entity. This process involves an assessment of the ability and
willingness of the parent to extend support to the entity (and vice versa), in addition to evaluating the entity’s
own fundamental credit strength.
As the CGD sector entails significant business risks, companies backed by strong sponsors, preferably with
background in oil and gas business, can be better placed to navigate the risks involved. Operational support
from sponsors can come in several ways, such as the competitively priced R-LNG tie-ups, co-location of
CNG stations in their retail outlets and tap off access from adjacent gas transmission pipelines.
Summing up
The credit risk profile of the CGD companies is evaluated considering the current stage of operations with
respect to volume sales, gross margins, consumer mix and gas tie-ups in place. Moreover, the future volume
growth in sales is analysed vis-à-vis the potential of the GA and competitiveness with alternate fuels. As the
project-stage CGD companies have to contend with high project execution risks, given the long execution
period involved and the multitude of approvals required from several agencies, factors that increase the
projects’ vulnerability to cost and time overruns as well as the status of approvals and support from the state
administration are evaluated. The companies setting up operations in new GAs are also analysed in terms
of their susceptibility to competition from third-party marketers in the long run and their ability to complete the
MWP on time, given the contingent liabilities (PBG) in case of delays in achieving MWP. Being a capital-
intensive industry, cash flows, capex plans, funding mix and debt repayment commitments are analysed
wherein a low leverage and/ or long tenure of loan could act as a counterweight to the high business risk
profile.

9. ICRA Rating Feature Rating Methodology for CGD Companies
ICRA Rating Services Page 9 of 9
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