Rationale

 The rating action factors in Indraprastha Gas Limited's (IGL) strong business profile with exclusive position in the city gas distribution (CGD) business in Delhi (or National Capital Territory, NCT) and infrastructure exclusivity (up to December 2023) for its NCT operations. The marketing exclusivity available to IGL in the NCT region expired in December 2011. ICRA, however, expects that the company will continue to enjoy a dominant market share because of its first mover advantage and significant entry barriers for third party marketers. IGL benefits from its strong parentage (GAIL India Limited; GAIL and Bharat Petroleum Corporation Limited; BPCL)1 in terms of technical/management support and operational synergy through its tie-up with GAIL for sourcing natural gas for meeting a sizeable part of its requirements. Additionally, the ratings factor in IGL's strong financial risk profile as by robust profitability with healthy accrual generation, debt-free status and its strong return and credit metrics. Emanating from these strengths, the company's liquidity position remains robust, with sizeable surplus cash/liquid investments. Despite significant dip in sales in Q1 FY2021 due to the adverse impact of the pandemic/nationwide lockdowns, IGL reported strong recovery in sales with an operating income (OI) of Rs. 4,940.8 crore in FY2021 (Rs. 6,485.3 crore in FY2020). However, the overall cash accrual generation for FY2021 was largely in line with the previous fiscal, supported by sizeable margin expansion due to lower gas prices during the fiscal. It recorded some moderation in revenue in Q1 FY2022 owing to the second wave of the pandemic, though the impact was significantly lower as compared to the first wave. IGL is expected to report steady growth, driven by the favourable demand outlook and growth prospects for the compressed natural gas (CNG) and piped natural gas (PNG) segments over the medium to long term. RLNG prices have firmed up in the recent quarters and domestic gas prices are also likely to witness a sharp increase in the near term. While this is likely to lead to some moderation in margins, the impact is expected to be mitigated, to a large extent, as the company has long-term tie-ups for sourcing of gas and would be able to absorb the same through price revisions in the various business segments. IGL's CGD operations in Delhi, Noida, Greater Noida and Ghaziabad have been authorised by the Central Government. The Government has authorised IGL for Faridabad and Gurugram as well. It is contesting for the entire Faridabad and Gurugram regions. The matter remains sub-judice at present. In the recent years, it has won several new geographical areas (GAs) in the 9 th and 10th rounds of bidding conducted by the Petroleum & Natural Gas Regulatory Board (PNGRB), which exposes it to execution risks and large contingent liabilities in the form of performance bank guarantees submitted for meeting the minimum work programme (MWP) and service standards. Notwithstanding the impact of the pandemic/lockdowns, the work progress on these GAs has been in line with the MWP requirements, with extensions given by PNGRB. Moreover, ICRA draws comfort from IGL's established track record and extensive experience in executing CGD projects. Given its strong liquidity profile, the company is comfortably placed to meet its commitments. ICRA also notes the company's interest in bidding for additional cities in further rounds of competitive bidding for CGD networks. If IGL were to be a successful bidder for any of the new cities put up for bidding by the regulator, ICRA will evaluate the impact of the same on its credit risk profile. IGL has aggressive expansion plans entailing an outlay of ~Rs. 1,300 crore annually over the next few years. While the large scale of the capex and the gestation period associated with build-up of sales volumes are expected to have some moderating impact on the company's return and credit metrics, the same is expected to remain robust on an absolute basis. The Stable outlook reflects ICRA's expectation that IGL will continue to benefit from steady demand outlook, strong market position and expansion of its CGD infrastructure across GAs, resulting in healthy internal accruals and liquidity position.