The positive rating action by ICRA is supported by several key factors.
ICRA has upgraded the long-term rating of Adani Total Gas Limited (ATGL), formerly known as Adani Gas Limited, to [ICRA]AA(Stable) while reaffirming the short-term rating.
According to ICRA, this upgrade is attributed to ATGL's improved financial risk profile, driven by sustained growth in sales volume, which has resulted in an increased scale of operations and better profitability.
ATGL has demonstrated financial performance, highlighted by a year-on-year operating income increase of approximately 2 per cent to Rs 4,417.7 crore in FY24.
This growth was largely fuelled by a 15% rise in gas sales volumes, reaching 2.37 million metric standard cubic meters per day (mmscmd) from 2.06 mmscmd in the previous fiscal year.
The company's financial health remains strong, with a comfortable gearing of 0.44 times as of March 31, 2024, and a total debt to operating profit before depreciation, interest, tax, and amortization (OPBDITA) ratio of 1.41 times.
The positive rating action by ICRA is supported by several key factors.
Firstly, the city gas distribution (CGD) sector benefits from a favourable gas allocation policy, which has driven up contribution margins.
Additionally, ATGL has expanded its reach through the addition of new geographical areas (GAs) awarded in the ninth and tenth CGD bid rounds, significantly contributing to revenue growth.
Furthermore, the revision in the Administered Pricing Mechanism (APM) gas pricing methodology in April 2023, which reduced APM prices to USD 6.5/mmbtu, along with the availability of High-Pressure High Temperature (HPHT) gas, has stabilized margins on CNG and Piped Natural Gas (PNG) sales.
ATGL's growth is also bolstered by its strong parentage, with equal holdings (37.4 per cent) by Total Energies SE and the Adani family.
This strategic partnership is expected to provide significant operational synergies, particularly in efficient gas sourcing, as Total Energies is a leading player in the global liquefied natural gas (LNG) market.
But, despite the positive outlook, ATGL faces several challenges as well. The company has significant ongoing capital expenditure (capex) plans amounting to Rs 9,500-10,500 crore over the next five years for developing the CGD network in newly awarded Geographical Areas (GA).
Timely execution of the minimum work programme (MWP) for each GA is critical to avoid penalties and maintain performance guarantees.
Additionally, securing long-term gas supplies at competitive prices for the PNG (industrial) and PNG (commercial) segments remains essential.
The stable outlook reflects ICRA's expectation of continued healthy growth in ATGL's sales volume, driven by favourable demand and the operationalization of new GAs.
The availability of low-cost domestic gas for the CNG and PNG (domestic) segments should support profitability and cash generation.
Environmental and social considerations also play a role in ATGL's strategy. The company is committed to promoting natural gas, a cleaner fuel, aligning with global environmental goals.
Initiatives to conserve natural resources and shift towards less carbon-intensive energy sources position ATGL favourably in the market.
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