2 Executive Summary
2.1 Brief Background and Purpose
2.1.1 India Infrastructure Trust ("the Trust" or "InvIT")
is a contributory irrevocable trust set up under the provisions of the Indian Trusts Act,
1882. This Trust has been set up on November 22, 2018.
2.1.2 The Trust is an infrastructure investment trust registered on
January 23, 2019 under the SEBI InvIT Regulations having registration number
IN/InvIT/18-19/0008. The Trust was set up in order to invest in infrastructure projects in
accordance with the SEBI InvIT Regulations.
2.1.3 The initial portfolio asset of the Trust is the Pipeline. The
Pipeline was earlier owned by EWPL and pursuant to the Scheme of Arrangement between EWPL
and PIL, as sanctioned by NCLT Mumbai vide order dated December 21, 2018 and NCLT
Ahmedabad vide order dated November 12, 2018, was transferred to PIL. Currently, the Trust
holds 100% of equity share capital of PIL.
2.1.4 The Trust, the Investment Manager, Reliance Industries Holding
Private Limited ("RIHPL") and PIL had entered into a Share Purchase
Agreement ("SPA") wherein the Trust acquired 100% of the issued and
paid-up equity share capital of PIL from RIHPL on the Completion Date i.e. March 22, 2019
("Transaction").
2.1.5 PIL operates a cross country, natural gas pipeline with a
pipeline length of ~1,480 kms (including dedicated lines) together with compressor
stations and operation centres that stretches from Kakinada (Andhra Pradesh) to Bharuch
(Gujarat) traversing through the states of Andhra Pradesh, Telangana, Karnataka,
Maharashtra and Gujarat (the asset is referred as "Pipeline" and activity
of operating the Pipeline is referred as "Pipeline Business").
Historically, the Pipeline Business has been owned and operated by EWPL.
2.1.6 PIL and RIL have entered into a Pipeline Usage Agreement ("PUA")
on March 19, 2019 and amendments thereto pursuant to which RIL will make agreed payments
on a quarterly basis in order to reserve certain capacity in the Pipeline for
transportation of gas.
2.1.7 As per regulation 21(4) of SEBI InvIT Regulations -
"A full valuation shall be conducted by the valuer not less than
once in every financial year. Provided that such full valuation shall be conducted at the
end of the financial year ending March 31st within two months* from the date of
end of such year. "
* Extended by 1 month by SEBI vide circular:
SEBI/HO/DDHS/DDHS_Div3/P/CIR/2021/563, dated May 14, 2021
2.1.8 In this regard, the IM has appointed the Valuer to undertake the
valuation of InvIT Asset in compliance of the above SEBI InvIT Regulation. ("Purpose").
2.2 Valuation Methodology Adopted
2.2.1 Considering the nature of business and information available,
InvIT Asset has been valued using Discounted Cash Flow ("DCF") Method
under Income Approach. We have used Free Cash Flow to Equity ("FCFE")
model under the DCF Method to arrive at the value of InvIT Asset.
2.2.2 For the purpose of arriving at the valuation of the InvIT Asset
we have considered the valuation base as ‘Fair Value' and the premise of value
is ‘Going Concern Value'. Any change in the valuation base, or the premise could
have significant impact on our valuation exercise, and therefore, this report.
2.3 Valuation Conclusion
2.3.1 The tariff as approved by PNGRB vide order dated March 12, 2019
considered for valuation of InvIT Asset is INR 71.66 per mmbtu.
2.3.2 The fair enterprise value of InvIT Asset pursuant to the agreed
terms of the Transaction Documents is arrived at INR 1,38,559.9 Mn.
3 Introduction
3.1 Terms of Engagement
3.1.1 We, BDO Valuation Advisory LLP having LLP identification number
AAN-9463 and IBBI Registration number IBBI/RV-E/02/2019/103, have been appointed by
Investment Manager, to determine the fair enterprise value of InvIT Asset on a going
concern basis as per SEBI InvIT Regulations.
3.1.2 This Report has been prepared by the Valuer pursuant to terms of
engagement letter dated April 1, 2021 between the Valuer and the Investment Manager
including the terms and conditions set out therein.
3.2 Background and Purpose of Valuation
3.2.1 The Trust is a contributory irrevocable trust set up under the
provisions of the Indian Trusts Act, 1882 on November 22, 2018.
3.2.2 The Trust is an infrastructure investment trust registered on
January 23, 2019 under the SEBI InvIT Regulations having registration number
IN/InvIT/18-19/0008. The Trust was set up in order to invest in infrastructure projects.
3.2.3 The initial portfolio asset of the Trust is a pipeline used for
the transportation of natural gas, with the potential to induct new assets in due course.
The Pipeline is a cross-country, natural gas pipeline with a pipeline length of
approximately 1,480 km (including dedicated lines) together with compressor stations and
operation centres that stretches from Kakinada, Andhra Pradesh, in the east of India, to
Bharuch, Gujarat, in the west of India, traversing adjacent to major cities in the states
of Andhra Pradesh, Telangana, Karnataka, Maharashtra and Gujarat. Historically, the
Pipeline was owned and operated by EWPL.
3.2.4 The Pipeline has been transferred from EWPL to PIL with effect
from the Appointed Date, pursuant to a Scheme of Arrangement that has been sanctioned by
the National Company Law Tribunal, Bench at Ahmedabad and the National Company Law
Tribunal, Bench at Mumbai (together the "NCLTs") on November 12, 2018 and
December 21, 2018 respectively (the "Scheme of Arrangement" or "Scheme").
Currently, the Trust beneficially holds 100% of the equity share capital of PIL.
3.2.5 PIL and RIL have entered into a pipeline usage agreement ("Pipeline
Usage Agreement" or "PUA") dated March 19, 2019 and amendments
thereto pursuant to which RIL has agreed to make payments to PIL on a quarterly basis in
order to reserve certain annual capacity of the Pipeline.
3.2.6 Rapid Holdings 2 Pte. Ltd ("Sponsor") is the
sponsor of the Trust, Brookfield India Infrastructure Manager Private Limited is the
Investment Manager of the Trust and Axis Trustee Services Limited is the Trustee of the
Trust.
3.2.7 ECI India Managers Private Limited, as the project manager (the
"Project Manager"), are responsible for the execution and management of
the projects.
3.2.8 The Project Manager, PIL and Pipeline Management Services Private
Limited (the "Contractor") have entered into an agreement for the
provision of certain operations and maintenance services by the Contractor in respect of
the Pipeline ("O&M Agreement").
3.2.9 In accordance with the sub-contracting provision in the O&M
Agreement, the Contractor, PIL and Reliance Gas Pipelines Limited (the "Sub-Contractor")
have entered into an operations and maintenance sub-contract agreement (the "O&M
Sub-Contract Agreement") for the operation and maintenance of a section of the
Pipeline.
3.2.10 Framework Agreement recorded the understanding among the parties
for, among others (1) transfer of the entire issued equity share capital of PIL to the
Trust; (2) subscription by the Trust to the Non-Convertible Debentures issued by PIL
("PIL NCDs"); (3) transfer of the Pipeline Business from EWPL to PIL
pursuant to the Scheme of Arrangement; and (4) repayment of the unsecured liability of INR
164,000 million.
3.2.11 PIL SHA sets out rights and obligation of parties to the
agreement in relation to PIL, including those of the Trust as the equity shareholder of
PIL and the holder of the PIL NCDs, and of RIL and the Trust in relation to the purchase
and transfer of the equity shares of PIL under certain circumstances and the manner of
distribution of cash flows of PIL and the terms of the redeemable preference shares in
compliance with applicable law.
3.2.12 Shared Service Agreement sets out the terms for RIL to provide
PIL and the Contractor with certain identified services in connection with the Pipeline
Business, for a period of three years, in order to enable business continuity, seamless
operations and an effective cost structure of the Pipeline Business, pursuant to the
demerger of the Pipeline Business from EWPL to PIL.
3.2.13 SSA records the understanding among various parties with respect
to issue, allotment and subscription of the CCPS.
3.2.14 Infrastructure Sharing Agreement sets out the terms for
permitting sub-contractor's nonexclusive access to certain facilities of
Sub-contractor which are laid on the Pipeline's right of usage area and are
co-located with the Pipeline facilities;
3.2.15 Joint Venture Agreement records the understanding among various
parties which include operation of and maintenance of Pipeline on behalf of PIL and the
Project Manager.
3.2.16 DTD Agreement provides the terms and conditions and stipulations
(pursuant to which the Debentures with issue amount of INR 64,520 Mn were issued) as well
as their respective obligations in respect of the issuance.
3.2.17 The units of the Trust are listed on BSE by way of private
placement.
3.2.18 In line with the Purpose mentioned earlier, the IM has appointed
BDO Valuation Advisory LLP to undertake the valuation of InvIT Asset in compliance of the
SEBI InvIT Regulations.
3.2.19 This Report should not be used or relied upon for any other
purpose. The suitability or applicability of this Report for any purpose other than that
mentioned above has not been verified by the Valuer.
3.3 Source of Information
3.3.1 For the purpose of this valuation exercise, we have relied on the
following sources of information:
i. Brief note on the operations of Pipeline Business;
ii. Tariff order for determination of Final Initial Unit Natural Gas
Pipeline Tariff by PNGRB dated March 12, 2019;
iii. Audited Financial statements of Pipeline Infrastructure Limited
for the year ended March 31, 2019, March 31, 2020 and March 31, 2021;
iv. Volumes transported by PIL from April 2020 to March 2021;
v. Income Tax Return of PIL for Assessment Year 2020-21 and draft
computation of income of PIL for Assessment Year 2021 -22;
vi. Framework Agreement amongst RIHPL and the Sponsor and the IM and
PIL dated August 28, 2018;
vii. Scheme of Arrangement between EWPL and PIL and their Respective
Shareholders and Creditors for transfer of Pipeline Business from EWPL to PIL;
viii. Joint Venture Agreement dated February 11, 2019, entered into
between the Project Manager, RIL and the Contractor and First Amendment Agreement dated
April 22, 2019 to the Joint Venture Agreement;
ix. PIL SHA dated February 11, 2019 amongst PIL, EWPL, IM, Trust and
RIL and First Amendment Agreement dated March 9, 2019 to the PIL SHA and Second Amendment
Agreement dated April 22, 2019 to the PIL SHA;
x. SPA dated February 11, 2019 amongst RIHPL, Trust, IM and PIL and
Amendment Agreement dated April 22, 2019 to SPA;
xi. SSA dated February 11, 2019 amongst PIL, RIIHL, and Trust;
xii. O&M Agreement dated February 11, 2019 amongst PIL, Contractor
and Project Manager;
xiii. O&M Sub-Contract Agreement dated February 11, 2019 amongst
PIL, Contractor, SubContractor;
xiv. PUA executed between PIL and RIL on March 19, 2019, Amendment
Agreement dated April 22, 2019 to the PUA and Clarificatory note to PUA dated December 24,
2019;
xv. Shared Service Agreement February 11, 2019 amongst PIL, RIL and the
Contractor and First Amendment Agreement dated April 22, 2019 to the Shared Service
Agreement;
xvi. Infrastructure Sharing Agreement dated February 11, 2019 between
Contractor, SubContractor and PIL;
xvii. Debenture Trust Deed dated April 16, 2019 between PIL And IDBI
Trusteeship Services Limited;
xviii. Copy of Orders approving the Scheme of Arrangement by the
National Company Law Tribunal, Bench at Ahmedabad and the National Company Law Tribunal,
Bench at Mumbai vide orders dated November 12, 2018 and on December 21, 2018,
respectively;
xix. EWPL Due Diligence Abridged Report issued by Wood Mackenzie dated
March 23, 2021 and related excel workings ("Wood Mackenzie Report");
xx. Virtual Inspection with respect to the Pipeline over video call.
Considering the current situation of COVID-19 it was not practical to undertake physical
inspection as required under Regulation 21(2) of SEBI InvIT Regulations;
xxi. Projected revenue expenditure and capital expenditure for
operations of PIL for period starting from April 1, 2021 to March 22, 2039;
xxii. Estimates of working capital of PIL for period starting from
April 1, 2021 to March 22, 2039;
xxiii. List of one-time sanctions/approvals which are obtained or
pending in relation to the Pipeline and list of up to date/ overdue periodic clearances in
relation to the Pipeline as on the Valuation Date;
xxiv. Details of material litigations in connection with the Pipeline
as on the Valuation Date;
xxv. FICCI Report titled "India Gas Infrastructure Indian Gas
Sector - Ushering in, an era of Growth" dated December, 2019 prepared by FICCI's
knowledge partner Ceresta Business Consulting ("FICCI Report").
xxvi. PNGRB report by industry group titled "Vision 2030 - Natural
Gas Infrastructure in India Report", available at
http://www.pngrb.gov.in/Hindi-Website/pdf/vision-NGPV-2030- 06092013.pdf ("PNGRB
Report").
xxvii. Other relevant data and information provided to us by the
Management whether in oral or physical form or in soft copy, and discussions with their
representatives; and
xxviii. Information available in public domain and provided by leading
database sources.
4 Caveats, Limitations and Disclaimers
4.1 Restricted Audience:
4.1.1 This Report and the information contained herein are absolutely
confidential and are intended for the use of the IM and the Trust in connection with the
Purpose set out in the Report.
4.1.2 It should not be copied, disclosed, circulated, quoted or
referred to, either in whole or in part, in correspondence or in discussion with any other
person except to whom it is issued without our written consent. It can however be relied
upon and disclosed in connection with any statutory and regulatory filing with SEBI, BSE
Limited or any other regulatory /statutory authority as per the SEBI InvIT Regulations
without any consent in connection with the Purpose mentioned earlier. This Report and the
extracts of this Report included herein can be reproduced and used for filings with SEBI,
BSE and any other statutory authority as required by the law. In the event the IM or the
Trust extend the use of the Report beyond the purpose mentioned earlier in the Report,
with or without our consent, we will not accept any responsibility to any other party
(including but not limited to the investors, if any) to whom this Report may be shown or
who may acquire a copy of the Report.
4.1.3 It is clarified that this Report is not a fairness opinion under
any of the stock exchange / listing regulations. In case of any third party having access
to this Report, please note that this Report is not a substitute for the third
party's own due diligence / appraisal / enquiries / independent advice that the third
party should undertake for its purpose.
4.2 Caveats, Limitations and Disclaimer :
4.2.1 The Report is subject to the limitations detailed hereinafter.
This Report is to be read in totality, and not in parts, in conjunction with the relevant
documents referred to therein.
4.2.2 This Report, its contents and the results herein are (i) specific
to the purpose of valuation agreed as per the terms of our engagement; (ii) the Valuation
Date and (iii) are based on the data detailed in the Section 3.3 - Sources of Information.
4.2.3 We were provided with sufficient information and time to make our
opinion for this valuation exercise. However, our opinion may change if any material
information is not disclosed / hidden from us during our valuation exercise.
4.2.4 The scope of the assignment did not include performing audit
tests for the purpose of expressing an opinion on the fairness or accuracy of any
financial or analytical information that was used during the course of the work. Further,
conducting a financial or technical feasibility study was also not covered.
4.2.5 During the course of this work, we have relied upon assumptions
and projections as provided by Management. These assumptions require exercise of judgment
and are subject to uncertainties.
4.2.6 Further, this Report is based on the extant regulatory
environment and the financial, economic, monetary and business/market conditions, and the
information made available to us or used by us up to, the date hereof, which are dynamic
in nature and may change in future, thereby impacting the valuation of InvIT Asset.
Subsequent developments in the aforementioned conditions may affect this Report and the
assumptions made in preparing this
Report and we shall not be obliged to update, review or reaffirm this
Report if the information provided to us changes. The information presented in this
valuation Report does not reflect the outcome of any due diligence procedures, which may
change the information contained herein and, therefore, the valuation Report materially.
Further events occurring after the date hereof may affect this Report and the assumptions
used in preparing it, and we do not assume any obligation to update, revise or reaffirm
this Report.
4.2.7 The recommendation contained herein is not intended to represent
value at any time other than the Valuation Date.
4.2.8 This Report is subject to the laws of India.
4.2.9 Valuation is not a precise science and the conclusions arrived at
in many cases will of necessity be subjective and dependent on the exercise of individual
judgment as the valuation analysis is governed by the concept of materiality. There is
therefore no indisputable single value. While we have provided an assessment of the value
based on an analysis of information available to us and within the scope of our
engagement, others may place a different value on the businesses.
4.2.10 Valuation is based on estimates of future financial performance
or opinions, which represent reasonable expectations at a particular point in time, but
such information, estimates or opinions are not offered as predictions or as assurances
that a particular level of income or profit will be achieved, a particular event will
occur or that a particular price will be offered or accepted. Actual results achieved
during the period covered by the prospective financial analysis will vary from these
estimates and the variations may be material.
4.2.11 The realization of these projections is dependent on the
continuing validity of the assumptions on which they are based. Since the projections
relate to the future, actual results are likely to be different from the projected results
in case of events and circumstances not occurring as projected and the differences may be
material. The Valuer's work did not constitute a validation of the financial
projections of the InvIT Asset under consideration and accordingly, the Valuer does not
express any opinion on the same, however, the Valuer has reviewed the financial forecast
for consistency and reasonableness and relied on them. The Valuer has not commented on the
appropriateness of or independently verified the assumptions or information provided to
us, for arriving at the financial projections. Further, while the Valuer has discussed the
assumptions and projections with the Management, our reliance on them for the purpose of
valuation should not be construed as an assurance about the accuracy of the assumptions or
the achievability of the financial projections.
4.2.12 This Report is based on information received from sources
mentioned herein and discussions with the Management. We have assumed that the parties
involved have furnished to us all information, which they are aware of concerning the
financial statements and respective liabilities, which may have an impact on our Report.
4.2.13 We have not done any independent technical valuation or
appraisal or due diligence of the assets or liabilities of the Trust or PIL or any of
other entity mentioned in this Report and have considered them at the value as disclosed
by the Trust and PIL in their regulatory filings or in submissions, oral or written, made
to us. Nothing has come to our knowledge to indicate that the material provided to us was
misstated or incorrect or would not afford reasonable grounds upon which to base our
Report.
4.2.14 We have not made any independent verification with respect to
the PIL's claim to title of assets or property (including the Pipeline) for the
purpose of this valuation. With respect to claim to title of assets or property we have
solely relied on representations, whether verbal or otherwise, made by the Management to
us for the purpose of this Report.
4.2.15 Except to the extent required under the SEBI InvIT Regulations,
we are not responsible for matters of legal nature including issues of legal title and
compliance with local laws in respect of PIL and also no consideration has been given to
litigation and other contingent liabilities that are not recorded in the financial of PIL.
4.2.16 The fee for the Report is not contingent upon the outcome of the
Report.
4.2.17 This Report does not look into the business / commercial reasons
behind any transaction nor the likely benefits arising out of the same. Similarly, it does
not address the relative merits of investing in InvIT as compared with any other
alternative business transaction, or other alternatives, or whether or not such
alternatives could be achieved or are available. The assessment of commercial and
investment merits of the Trust are sole responsibility of the investors of the Trust and
we do not express any opinion on the suitability or otherwise of entering into any
financial or other transactions with the Investment Manager, the Trust or PIL.
4.2.18 In rendering this Report, we have not provided any legal,
regulatory, tax, accounting, actuarial advice and accordingly we do not assume any
responsibility or liability in respect thereof.
4.2.19 For the present valuation exercise, we have also relied upon
information available in the public domain; however, the accuracy and timeliness of the
same has not been independently verified by us.
4.2.20 In the particular circumstances of this case, we shall be liable
only to the IM and the Trust. We shall have no liability (in contract or under statute or
otherwise) to any other party for any economic loss or damage arising out of or in
connection with this engagement, however the loss or damage is caused, as laid out in the
engagement letter, for such valuation work.
4.2.21 Whilst, all reasonable care has been taken to ensure that facts
stated in the Report are accurate and opinions given are fair and reasonable, neither us,
nor any of our Partners or Employees shall in any way be responsible for the contents
stated herein. Accordingly, we make no representation or warranty, express or implied, in
respect of the completeness, authenticity or accuracy of such statements. We expressly
disclaim any and all liabilities, which may arise based upon the information used in this
Report.
4.2.22 The estimate of value contained herein are not intended to
represent value of the InvIT Asset at any time other than the dates specifically mentioned
for each valuation result, as per the agreed scope of engagement and as required under the
SEBI InvIT Regulations.
4.2.23 Please note that the valuation has been performed as of March
31, 2021 and reflects the information available as of that date. Economic conditions,
market factors and performance change may result in our conclusions becoming quickly
outdated, particularly due to the significant unforeseen impact of the COVID-19 pandemic.
4.2.24 Valuation results and underlying projections and assumptions
used for valuation may be materially affected by increased volatility in current and
future economic, political, regulatory, financial, market or other circumstances as a
result of COVID-19 and accordingly higher degree of caution should be attached to the
valuation than may normally be the case.
5 Assignment Approach
The overall approach that we have followed to arrive at value of InvIT
Asset is summarized below:
i. In the initial stage, we requested for detailed information required
for valuation of InvIT Asset.
ii. We reviewed the information provided for understanding of the
current business operations and any changes since the past financial year and then had
various discussions with the Management to gain insight on the future business operations.
iii. We analyzed the additional information and business model received
post preliminary discussion. We had various discussions with the Management on the
business model, assumptions considered and future business outlook. We also reviewed the
Wood Mackenzie Report.
iv. We obtained various disclosures from the Management pertaining to
approvals and litigations of the InvIT Asset as required under the SEBI InvIT Regulations.
v. Virtual Site visit was conducted on May 12, 2021 of Compressor
Station (CS - 3) situated near Nalagonda, Telangana.
Considering the current situation of COVID-19 it was not practical to
undertake physical inspection as required under Regulation 21(2) of SEBI InvIT
Regulations, hence we have undertaken a virtual site visit through video call.
vi. We carried out the valuation based on internationally accepted
valuation methodology, international valuation standards and applicable Valuation Standard
issued by ICAI and considering the information provided to us.
6 Overview of Pipeline Business
6.1 Pipeline
6.1.1 The Pipeline is a cross country, natural gas pipeline with a
pipeline length of ~1,480 kms (including dedicated lines) together with compressor
stations and operation centres that stretches from Kakinada (Andhra Pradesh) to Bharuch
(Gujarat) traversing through the states of Andhra Pradesh, Telangana, Karnataka,
Maharashtra and Gujarat.
6.1.2 The Pipeline comprises of trunk pipeline, compressor stations,
mainline sectionalizing valve stations, tap-off stations, spur lines, metering and
regulating stations and pipeline operation centres.
6.1.3 Total 37 Mainline Sectionalizing Valve ("MLV") stations
are installed along the Pipeline route so as to allow isolation of a section of Pipeline
in event of an emergency and/or repairs.
6.1.4 There are 11 Compressor Stations ("CS") installed
en-route the Pipeline to receive gas supplies at On-shore Terminal ("OT"), boost
pressure along the way and to deliver the gas at required pressure to the downstream
pipelines.
6.1.5 The CS houses the facilities like gas turbine compressors, gas
engine generators, gas after coolers, pigging receiver and launchers, electrical
sub-station and other utilities like diesel generators, firefighting equipment and storage
etc.
6.1.6 The Pipeline has interconnects for receipt and delivery of gas
connecting to source and other cross-country pipelines such as DVPL / DUPL / GSPL-HP &
KG Basin networks. Metering and regulating stations are located at these inter-connects
and at customer locations. Tap-offs are also provided for new connections at regular
intervals.
6.1.7 For managing the operations of the pipeline, main operation
centre is located at CS01 Gadimoga, Andhra Pradesh and backup operations centre is located
at CS08 Kalyan, Thane Local Control Centre has been provided at every Compressor Stations
en-route the pipeline. Maintenance bases along with warehouse facilities have been set up
at CS-03 and CS-08 apart from first level maintenance facilities provided at each of the
compressor station en-route the pipeline.
6.1.8 Gas accounting for the pipeline is done in energy terms (i.e.
gross heating value - GHV).
6.2 Route Map of the Pipeline
6.2.1 Above map reflects the route map of the Pipeline.
6.2.2 There are 11 Compressor Stations along the Pipeline as
highlighted in the map above.
6.2.3 Currently there are 4 Receipt/ Gas Intake Points and 10 Delivery
/ Interconnects in the Pipeline which spreads across the states of Andhra Pradesh,
Telangana, Karnataka, Maharashtra and Gujarat.
6.3 Business Model
6.3.1 The Company provides transportation services to customers for
transportation of gas from any particular entry point (i.e. source/ upstream pipeline) to
any exit point (i.e. customer point/downstream pipeline).
6.3.2 The Pipeline usage capacity is booked by the customers for which
a Framework Gas Transportation Agreement (FGTA) is entered into between customers and PIL.
FGTA provides for framework of general terms and conditions for transportation services
rendered by PIL. After execution of FGTA, Gas Transportation Agreement ("GTA")
is entered into between customers and PIL for each of the specific transaction of
transportation. GTA incorporates the terms of the FGTA by reference.
6.3.3 The key terms included in the GTA are as follows:
| Sr. No. |
Particulars |
Key Terms of GTA |
| I |
Tariff |
- Tariff Rate in INR/mmbtu as approved by PNGRB |
| II |
Terms |
- As mutually agreed between parties |
| III |
Ship or Pay |
- Monthly 90% of Maximum Delivery Quantity (MDQ) level |
| IV |
Payment Terms |
- Fortnightly invoicing |
|
|
- Payments within 4 days of invoice |
|
|
- Disputed amount will be paid in full, pending dispute
settlement |
| V |
Payment Security |
- Shipper shall provide LC covering 30xMDQx(Tariff + Taxes) |
| VI |
PIL Liability Cap |
- 50% of annual transportation charges |
| VII |
Planned Maintenance |
- Without liability for ship or pay and liquidated damages |
|
|
- Total of 10 days annually allowed for transporter |
6.3.4 Gas Parking services are also provided wherein the customer can
request for temporary storage space in the Pipeline for a service charge. PIL would be
offering other value added imbalance management services in future in terms of the PNGRB
regulations*.
6.3.5 PNGRB is a nodal agency to regulate and monitor the downstream
activities, notify regulations and monitor compliance. It is also responsible for granting
authorization to build and operate pipelines and city gas distribution networks.
6.3.6 The regulations mandate that at least 25% of capacity should be
available on a common carrier first cum first serve basis. Therefore upto 75% of the
capacity can be contracted.
* As per Petroleum and Natural Gas Regulatory Board (Imbalance
Management Services) Third Amendment Regulations, 2020 issued by notification dated
November 23, 2020
6.4 Tariff Determination as per Tariff Regulations
6.4.1 PNGRB has been authorized to regulate the tariff for
transportation of gas based on the tariff submitted by the transporters and the
regulations prescribed for such determination.
6.4.2 The tariff for gas transportation is divided into various zones
of 300 km along the route of the natural gas pipeline from the point of entry till the
point of exit as per the contract.
6.4.3 Initially a levelized tariff is determined for transportation
through the entire gas pipeline post which the zonal tariffs are determined based on
estimated volumes for various zones.
6.4.4 No subsequent tariff adjustment is allowed on account of
variation in actual zonal volumes visa-vis the estimated zonal volumes.
6.4.5 The key factors considered while determination of tariff are as
follows:
| Sr. No. |
Factors |
Stipulations |
| I |
Economic Life |
- 25 years |
| II |
Tariff Method |
- DCF, ROCE @ 12% post tax |
| III |
Capex & Opex |
- Lower of Normative/Actual |
| IV |
Working Capital |
- 30 days opex and 18 days receivables |
| V |
System Use Gas |
- (Gas price + tariff ) x quantity |
| VI |
Volume for Tariff Fixation |
- Higher of Normative or Actual |
|
|
- Normative Volumes are determined as under - |
|
|
I -V years : 60%, 70%, 80%, 90%, 100% of 75% of |
|
|
Capacity |
|
|
Year VI Onwards: 75% of Capacity or firm contracted |
|
|
volumes |
|
|
whichever is higher |
|
|
- Volume Adjustment in first five years is permitted |
| VII |
Capacity |
- As determined by PNGRB under relevant guidelines |
| VIII |
Tariff Overview |
- Initial tariff fixed for first year |
|
|
- First regular tariff for next five years |
|
|
- Subsequently fixed and reviewed every five years |
6.4.6 In March 2020, PNGRB amended tariff regulations and incorporated
explanation to consider lower nominal corporate tax rate for grossing up the allowed
return, in case more than one nominal corporate tax rates are available.
6.5 List of one-time sanctions/approvals which are obtained or pending
in relation to the Pipeline and list of up to date/ overdue periodic clearances:
6.5.1 Disclosed in Annexure III of the Report as per information
provided by the Management. We have reviewed the validity of various sanctions/ approvals/
clearances obtained with the documents provided to us by the Management.
6.6 Material Litigations/ Factors related to the Pipeline
6.6.1 We have been informed by the Management about the material
litigations with respect to the Pipeline, we have not independently reviewed the
litigations details. As per the Scheme for transfer of Pipeline from EWPL to PIL, the
liabilities in relation to the Pipeline are also transferred from EWPL to PIL. Hence, we
have disclosed the litigation related to the Pipeline as per information provided to us by
the Management.
6.6.2 The details of the key litigations which may have bearing on the
valuation have been disclosed below and disclosure of other litigations as required under
SEBI InvIT Regulations have been provided in Annexure IV.
6.6.3 Litigation related to Capacity Assessment
• PNGRB vide letter dated July 10, 2014 declared the final
capacity for FY11 and FY12 as 85 mmscmd and 95 mmscmd respectively ("Order I").
• EWPL filed an appeal on August 8, 2014 against the Order I
before the APTEL.
• APTEL passed an order on July 8, 2016 setting aside Order I inter
alia on the ground that there was a breach of principles of natural justice and
remanded the matter back to PNGRB.
• Subsequently, PNGRB vide its order dated December 30, 2016
declared capacity of Pipeline to be 85 mmscmd and 95 mmscmd for FY11 and FY12 respectively
("Order II").
• EWPL filed an appeal before the APTEL for setting aside Order
II, directing PNGRB to
declare the capacity for FY11 and FY12, and for the subsequent periods
i.e. FY13 to FY16, taking into account the change in parameters, within a reasonable time.
• Pending decision of the appeal, EWPL moved an interim
application before APTEL for determining the capacity of EWPL as per Acceptance to the
Authorization letter issued by PNGRB, as per Determination of Natural Gas Pipeline Tariff
Regulations - Amendment 2015. APTEL, pending adjudication of the capacity appeal, vide
order dated November 20, 2018 directed PNGRB to consider the capacity of EWPL as 85 MMSCMD
for the years 2009 to 2018. The matter is currently pending.
• PNGRB declared final tariff on March 12, 2019 i.e. INR
71.66/MMBtu. Zonal apportionment of tariff has been to submitted PNGRB on March 20, 2019.
• APTEL allowed the appeal filed by PIL vide order dated November
15, 2019 and directed PNGRB to declare the capacity of PIL taking into consideration of
operational parameters of the Pipeline and to decide the capacity within 3 months.
• PNGRB moved an interim application no. 2254 of 2019 seeking
extension of time for determination of capacity of the pipeline. PNGRB filed the reports
submitted by the EIL a consultancy firm appointed for capacity assessment of the PIL
Pipeline and PIL filed its reply to the said reports.
• Subsequently to PIL's reply filing, PNGRB filed its
re-joinder to PIL's reply in APTEL on April 08, 2021. Pursuant to APTEL allowing to
submit response, PIL filed its reply on April 30, 2021 denying the assumptions of PNGRB
and sought the intervention of APTEL. Though the matter was listed for hearing on May 07,
2021, APTEL did not take up any matter in view of prevailing Covid situation and all the
pending matters listed on that day, including PIL pipeline capacity matter, have been
postponed and listed for hearing to July 30, 2021.
6.7 Site Visit Details
6.7.1 We had conducted virtual site visit of Gas Compressor Station No.
3 (CS - 3) located near Nalagonda, Telangana on May 12, 2021 through video call. In view
of the ongoing COVID-19 situation in the country, physical inspection of the Pipeline as
required under the SEBI InvIT Regulations was practically not possible. Certain
photographs of the site have been provided below:
6.7.2 Certain photographs of the site as provided by the Management
have been provided below:
6.8 Other disclosures as required under the SEBI InvIT Regulations have
been provided in Annexure V of the Report.
7 Industry Overview3
7.1 Introduction
7.1.1 The future of India's energy sector and a large part of its
economic development will be dominated by energy transition in the coming years, where
conventional fossil fuels such as diesel and oil will take a backseat. Global
environmental commitments and domestic regulations are pushing India to switch to cleaner
and more efficient energy sources, forcing the country to place energy infrastructure at
the top of the agenda.
7.1.2 The Government of India has fixed an ambitious target of
increasing the share of gas in the energy basket to 15% by 2030. However, this is
accompanied with its own set of issues. Currently, the natural gas sector in India is
facing major challenges due to lack of a robust gas infrastructure to support our desire
to transition into a gas-based economy. Moving towards a gas-based economy and putting in
place a robust infrastructure base go hand in hand and cannot be treated separately.
7.1.3 The energy sector is one of the major sectors which is going to
see enormous growth in the coming years, in the context of Indian population reaching
approximately 1.44 billion people by 2024 creating greater demand for energy. India has
committed to low carbon energy and hence its energy portfolio mix is going to undergo
major changes, with Renewables and Natural Gas set to play a major role. India has the
potential to be a much larger producer and consumer of natural gas.
7.1.4 Historically, natural gas was significantly cheaper than
alternate fuels like motor spirit, naphtha, diesel and low sulphur heavy stock
("LSHS") / furnace oil ("FO"). Although the price of natural gas is
increasing (especially of imported gas), newer technology and larger plants have made it
possible to ensure efficiency and economies of scale, enabling an increase in the usage of
natural gas. As such, natural gas has become the preferred fuel for fertilizers,
petrochemicals and, increasingly, the power generation sector. Further, planned
investments in power, fertilizer, petrochemical and other areas including city gas
distribution suggest a sustained increase in India's level of natural gas
consumption.
7.1.5 During the 2000 to 2004 period, India's gas market witnessed
gas discoveries in the Krishna Godavari Basin ("KG Basin"), the setting up of
the liquefied natural gas ("LNG") re-gasification terminal and the commencement
of LNG supply and successful execution/roll out of city gas distribution projects. These
developments had a positive impact on the environment and led to plans to set up a
regulator due to the emergence of gas economy and related infrastructure development.
During the 2004 to 2011 period, India witnessed the beginning of the gas era, with
successful commencement and operation of LNG terminal, expansion of the transmission
pipeline network in the north-western corridor and the new network in the east-west
corridor, setting up of the regulator, the Petroleum and Natural Gas Regulatory Board
("PNGRB"), and the authorization of new pipelines and geographical areas
("GA"s) for the city gas distribution ("CGD") network, an increase in
gas production from the KG Basin and increased supply of gas to many end use sectors.
During this period, the government announced a Gas Allocation Policy prescribing
sector-wise allocation for gas being produced from the KG Basin. The following period,
2011 to 2015, witnessed an unprecedented decline of gas production
from the KG Basin, from approximately 60 million metric standard cubic
meter per day ("MMSCMD") to approximately 10 MMSCMD. Gas production forecasts
from other fields/discoveries in the KG Basin also failed to materialize. With declining
gas production from the traditional fields of the Oil and Natural Gas Corporation
("ONGC"), India witnessed a continuous decline period in gas production for five
years and the government decided to not pursue any new gas based power projects, due to
stranded power projects of approximately 14,000 megawatts ("MW"). The current
government is trying to reduce the uncertainty in the gas market by announcing policies to
attract investments and increase production.
7.2 Demand and Supply
7.2.1 The Natural Gas pipeline business and over all Natural Gas
related business are interdependent, i.e. pipeline provides important connectivity to the
suppliers and consumers and without adequate Natural Gas requirement and supply, the
pipeline business will not be feasible. Hence, it becomes important to analyze demand and
supply situation of over all Natural Gas industry.
7.2.2 Supply Side Scenario
In the past, various supply projections have consistently fallen short
of their target due to:
• the declining production from the prospective KG Dhirubhai 6
("D6") fields;
• the declining production from traditional producing fields; and
• a lack of supply caused by the announcement of new finds from
the KG Basin.
Following sets forth the historical and forecasted trend of
India's natural gas supply:
(MMSCM)
| Details |
Financial Year |
|
|
|
March |
|
|
2018-19 |
2019-20 2 |
020-21 P |
2019-20 2020 |
21 (Target) 20 |
20-21 (P) |
| (a) Gross Production |
32,875 |
31,184 |
28,671 |
2,415 |
3,162 |
2,684 |
| - ONGC |
24,677 |
23,746 |
21,872 |
1,906 |
2,050 |
1,832 |
| - Oil India Private Limited (OIL) |
2,722 |
2,668 |
2,480 |
212 |
261 |
210 |
| - Private/Joint Ventures (JV's) |
5,477 |
4,770 |
4,319 |
298 |
850 |
642 |
| (b) Net Production (excluding flare gas and loss) |
32,058 |
30,257 |
27,738 |
2,327 |
|
2,612 |
| (c) LNG Import* |
28,740 |
33,887 |
32,855 |
2,970 |
|
2,972 |
| (d) Total Consumption (including internal consumption) (b+c) |
60,798 |
64,144 |
60,637 |
5,297 |
|
5,584 |
| (e) Total Consumption (in BCM) |
60.8 |
64.1 |
60.6 |
5.3 |
|
5.6 |
| (f) Import dependency based on consumption (%) (c/d*100) |
47.3% |
52.8% |
54.2% |
56.1% |
|
53.2% |
*
Jul 2020-Mar 2021 Source: Directorate General of Commercial
Intelligence and Statistics data and RIL March 21 data prorated.
Production of natural gas for the month of March 2021 was estimated
2,684 MMSCM which was higher by 11.1% compared with the corresponding month of the
previous year.
LNG import for the month of March 2021 was estimated 2,972 MMSCM which
was 0.1% higher than the corresponding month of the previous year.
7.2.3 Demand Side Scenario
The gas supply has always been a deterrent factor for the sectoral
growth. India's gas demand is much higher than the total gas supply in the country
including both domestic supply and imported gas. However, the different demand sectors
have varying demand dynamics and price sensitivities. The demand for natural gas in India
is expected to get more than triple in the period 2012-13 (243 MMSCMD) to 2029-30 (746
MMSCMD) according to Vision 2030 document of PNGRB.
Sector wise gas consumption for 2019-20 (figures in mmscmd):
| Sr. No. |
Sector |
Domestic Gas |
R-LNG |
Total |
| 1 |
Power |
20.1 |
10.1 |
30.2 |
| 2 |
Fertilizers |
17.8 |
26.1 |
43.9 |
| 3 |
City Gas Distributions |
16.0 |
12.7 |
28.7 |
| 4 |
Others |
14.4 |
36.0 |
50.4 |
|
Total |
68.3 |
84.8 |
153.2 |
Power sector dominates the Domestic Gas consumption while the
Fertilizer sector has a larger share in the LNG consumption. About a decade ago, the two
sectors had a share of almost 70% which has fallen to around 48% in 2019-20. During the
intervening period, the share of power sector has fallen significantly, because of fall in
domestic gas production and therefore stoppage of allocation of KG D6 gas to the sector.
Fertilizer has indeed maintained its share of allocation of gas since that sector retained
its priority tag though its percentage share in consumption has fallen. High priced LNG
has never been an option for power sector and hence its share fell along with domestic
supply fall. In fact, more than 14,000 MW of new gas based power plants were rendered
stranded by lack of domestic gas supply.
The introduction of a government reverse bidding subsidy scheme for
supply of LNG to these stranded power plants to make them operational at 35% Plant Load
Factor did revive some of these plants for two years. Effectively, power sector will be a
non-consumer of gas (barring the old supplies), if further domestic gas is not made
available or there is no special government scheme for supply of R-LNG to the sector with
incentives. As far as fertilizer plants are concerned, most of the existing plants have
converted to gas and they continue to get supply. But in terms of future growth for gas
demand, the sector has limited potential and hence any new LNG terminal operators do not
look at it as a major anchor barring some scope for revival of a couple of plants.
Indian Natural Gas Demand - Affordability Matrix
| Delivered Cost Range (USD/MMBTU) |
Consumption Sectors |
Estimated Demand Composition % |
| USD 10 - 15 |
LPG, Refinery - Feedstock, Petrochemicals, |
45%-48% |
|
Diesel Back-up Power, Peak Power and other new areas of gas
usage |
|
| USD 7.5 - 10 |
Fertilizer, GCD, Industrial/Commercial |
|
| USD 5.5 - 7.5 |
CGD - Transport / Domestic, Refinery Fuel, Industry Fuel |
55%-60% |
| < USD 5.5 |
Base Power |
|
7.3 Future Outlook of Natural Gas
7.3.1 The power sector is limiting its LNG usage due to the base power
being highly sensitive to gas price. Any gas that priced over USD 5.5 / one million
British thermal units ("mmbtu") makes it challenging for gas based power
to compete with coal based power. With renewable power prices also decreasing in recent
years, the competitiveness of gas based power faces a challenge and therefore, a
specifically focused strategy on the power sector to make gas usage viable or acceptable
is required.
7.3.2 Outlook FY22: Overall production of natural gas is to rise on the
back of scale up natural gas production from the KG basin block. Consumption of natural
gas has been recovering and during FY22, demand for natural gas is to turn positive. Given
the government's thrust towards propagating the use of natural gas, consumption is to
be supported by the increase of its use in the CGD network. Stability in urea production
will also support gas consumption. Imports of natural gas in the form of LNG are to
increase by 18.2%.
7.3.3 The following table sets forth the domestic natural gas price and
gas price ceiling (gross calorific value basis):
| Period |
Domestic Natural Gas Price in
USD/MMBTU |
Gas Price ceiling in USD/MMBTU |
| November 2014 - March 2015 |
5.05 |
- |
| April 2015 - September 2015 |
4.66 |
- |
| October 2015 - March 2016 |
3.82 |
- |
| April 2016 - September 2016 |
3.06 |
6.61 |
| October 2016 - March 2017 |
2.50 |
5.30 |
| April 2017 - September 2017 |
2.48 |
5.56 |
| October 2017 - March 2018 |
2.89 |
6.30 |
| April 2018 - September 2018 |
3.06 |
6.78 |
| October 2018 - March 2019 |
3.36 |
7.67 |
| April 2019 - September 2019 |
3.69 |
9.32 |
| October 2019 - March 2020 |
3.23 |
8.43 |
| April 2020 - September 2020 |
2.39 |
5.61 |
| October 2020 - March 2021 |
1.79 |
4.06 |
| April 2021 - September 2021 |
1.79 |
3.62 |
7.3.4 While India has a huge potential market, global market dynamics
in the last 3 years have posed a plethora market related challenges - US Henry Hub
gas-based contracts are no longer as attractive compared to the time when it was signed,
especially in the current market conditions of oil and gas prices. Vanishing of premium in
gas indexed contracts vis-a-vis oil indexed contracts due to steep fall in oil prices and
reluctance of end use customers to enter into long term agreements have made companies
vulnerable. Even attempts to trade US LNG in international markets is a major issue due to
down trend in spot LNG prices.
7.4 India's Gas Transmission Infrastructure
7.4.1 Indian natural gas sector is facing one of the major challenges
in recent years in terms of lower quantum and sluggish growth in domestic gas production,
challenges of underutilization of regasification and transmission pipeline infrastructure
and global oil and gas market dynamics.
7.4.2 Though gas industry in India has witnessed growth in terms of
demand and infrastructure in the last decade, the growth has still remained limited to few
regions and the pipeline and distribution infrastructure has remained confined to a few
states in the West - North belt and East to West. When it comes to utilization of these
pipelines, the situation has not improved significantly. While new pipelines are being
constructed in various parts of India including South and East, the progress has been very
slow.
7.4.3 India's gas transmission infrastructure has been growing since
the completion of the first long term LNG deal in late 1990s and the supply of gas from
new sources during the 2001 to 2010 period. Additional arterial pipeline network on the
Hazira- Vijaipur - Jagdishpur corridor and the east-west corridor and the regional network
in the Mumbai and Gujarat regions provided
the necessary impetus to growth. The CGD infrastructure also grew along
with these corridors and regions. The decline in domestic production and the challenges of
using high priced LNG caused pipeline utilization to decrease.
7.4.4 The following table sets forth an overview of India's gas
pipeline infrastructure as on June 30, 2020 :
| Sr. No. |
Transporter |
Length (Km) |
% Share |
| 1 |
GAIL |
11,774.1 |
69.2% |
| 2 |
PIL |
1,460.0 |
8.6% |
| 3 |
IOCL |
155.0 |
0.9% |
| 4 |
ONGC |
24.0 |
0.1% |
| 5 |
GSPL |
2,264.6 |
13.3% |
| 6 |
GGL |
73.2 |
0.4% |
| 7 |
RGPL |
312.0 |
1.8% |
| 8 |
AGCL |
104.7 |
0.6% |
| 9 |
DFPCL |
42.0 |
0.2% |
| 10 |
GIGL |
442.0 |
2.6% |
| 11 |
GITL |
364.0 |
0.0 |
|
Total |
17,015.6 |
100.0% |
7.4.5 In the transmission pipeline segment, one of major enablers of
growth and capacity utilization, besides regular access to multiple sources of gas and
demand centers across the network, is the government's policy and regulation.
Regulations are expected to provide a fair and level playing field for operators while
ensuring that the customers get a regular supply at reasonable prices. Consecutively, the
regulation must facilitate the investment and expansion of the network by serious players,
while keeping economic viability in view. When such growth enablers are stifled, it has a
direct impact on pipeline capacity creation and utilization. This issue is brought out by
the low capacity utilization of the existing pipeline network.
7.4.6 Though government laid out ambitious plan to double the pipeline
network and Indian pipeline companies have obtained authorization for a number of
pipelines through PNGRB, the progress of construction of these pipelines has been behind
schedule.
India Gas Pipeline Infrastructure under Execution as on June 30, 2020 -
| Sr. No. |
Pipeline |
Entity |
Length under construction (Km) |
% Share |
| 1 |
Kakinada - Vishakapatnam - Srikakulam |
APGDC |
391.0 |
2.5% |
| 2 |
Jaigarh - Mangalore |
HEPL |
749.0 |
4.8% |
| 3 |
Kakinada - Vijayawada - Nellore |
IMC |
667.0 |
4.3%o |
| 4 |
North - East Natural Gas Pipeline Grid |
IGCL |
1,656.0 |
10.7% |
| 5 |
Kanai Chhata - Shrirampur |
Consortium of H - Energy |
317.0 |
2.0% |
| 6 |
Srikakulam - Angul |
GAIL |
690.0 |
4.4% |
| 7 |
Mumbai - Nagpur - Jharsuguda |
GAIL |
1,755.0 |
11.3% |
| 8 |
Chainsa - Jhajjar - Hissar |
GAIL |
145.0 |
0.9% |
| 9 |
Dadri - Bawana - Nangal |
GAIL |
125.0 |
0.8% |
| 10 |
Kochi - Koottanad - Bangalore - Mangalore |
GAIL |
723.0 |
4.7% |
| 11 |
Mehsana - Bhatinda |
GIGL |
1,712.0 |
11.0% |
| 12 |
Bhatinda - Jammu - Srinagar |
GIGL |
623.0 |
4.0% |
| 13 |
Mallavaram - Bhopal - Bhilwara - Vijaipur |
GITL |
1,678.0 |
10.8% |
| 14 |
Dabhol - Bangalore |
GAIL |
218.0 |
1.4% |
| 15 |
Ennore - Tuticorin |
IOCL |
1,398.0 |
9.0% |
| 16 |
Jagdishpur- Haldia - Bokaro - Dhamra - Paradip - Barauni -
Guwahati |
GAIL |
2,696.0 |
17.3% |
|
Total |
|
15,543.0 |
100.0% |
7.4.7 India has been, both in the past and currently, evaluating a
number of options of gas supply through Transnational pipelines -
• Turkmenistan - Afghanistan - Pakistan - India Pipeline (TAPI)
• Iran - Pakistan - India Pipeline (IPI)
• Iran - India Pipeline (with Oman Link)
• Russia - India Pipeline via Iran / Middle East
• Middle East India Deep Water Pipeline (MEIDP) - (Oman-India
Pipeline)
7.4.8 Given the challenges faced by LNG terminal investors in tying up
demand for LNG in India, the transnational pipelines would really face major challenges
because of the huge investment involved and the price and market competition faced by them
in Indian gas markets.
7.4.9 Many of the transnational pipelines proposed in the past have had
challenges of security threat or logistics or economics. Oman to India deep water pipeline
has been presented to the Ministry as an economically viable and sustainable alternative
with no major expected security threat.
8 Valuation Approach
The present valuation exercise is being undertaken to arrive at fair
enterprise value of InvIT Asset for the purpose as mentioned above in the Report. We have
considered Fair Value as the valuation base for estimating the fair enterprise value of
InvIT Asset.
There are three generally accepted approaches to valuation:
i. "Cost" Approach
ii. "Income" Approach
iii. "Market" Approach
Within these three basic approaches, several methods may be used to
estimate the value. An overview of these approaches is as follows:
8.1 Cost Approach
8.1.1 The cost approach values the underlying assets of the business to
determine the business value of the InvIT Asset. This valuation method carries more weight
with respect to holding companies than operating companies. Also, asset value approaches
are more relevant to the extent that a significant portion of the assets are of a nature
that could be liquidated readily if so desired.
i. Net Asset Value Method
• The Net Asset Value ("NAV") method under cost
approach, consider the assets and liabilities, including intangible assets and contingent
liabilities. The net assets, after reducing the dues to the preference shareholders, if
any, represent the value of the company.
• NAV method is appropriate in a case where the major strength of
the business is its asset base rather than its capacity or potential to earn profits.
• This valuation approach is mainly used in cases where the asset
base dominates earnings capability.
• As an indicator of the total value of the entity, the net asset
value method has the disadvantage of only considering the status of the business at one
point in time.
• Additionally, net asset value does not consider the earning
capacity of the business or any intangible assets that have no historical cost. In many
respects, net asset value represents the minimum benchmark value of an operating business.
ii. Break Up Value Method
• Under the Break Up Value ("BV") method, the
assets and liabilities are considered at their realizable (market) values including
intangible assets and contingent liabilities, if any, which are not stated in the balance
sheet. From the realizable value of the assets, the payable value of all liabilities
(existing plus potential) are deducted to arrive at the BV of the company.
• This Valuation approach is mostly used in case of companies
where there are huge operating investments or surplus marketable investments.
8.2 Income Approach
8.2.1 The Income approach focuses on the income prospects of a company.
i. Discounted Cash Flow Method
• Under the Discounted Cash Flow ("DCF") method,
the value of the undertaking is based on expected 'cash flows for future, discounted at a
rate, which reflects the expected returns and the risks associated with the cash flows as
against its accounting profits. The value of the undertaking is determined as the present
value of its future free cash flows.
• Free cash flows are discounted for the explicit forecast period
and the perpetuity value thereafter. Free cash flows represent the cash available for
distribution to both, the owners and creditors of the business.
• Discount rate is the Weighted Average Cost of Capital ("WACC"),
based on an optimal vis-a-vis actual capital structure. It is appropriate rate of discount
to calculate the present value of future cash flows as it considers equity-debt risk and
also debt-equity ratio of the firm.
• The perpetuity (terminal) value is calculated based on the
business's potential for further growth beyond the explicit forecast period. The "constant
growth model" is applied, which implies an expected constant level of growth (for
perpetuity) in the cash flows over the last year of the forecast period.
• The discounting factor (rate of discounting the future cash
flows) reflects not only the time value of money, but also the risk associated with the
business's future operations.
• The Business/Enterprise Value so derived, is further reduced by
value of debt, if any, (net of cash and cash equivalents) to arrive at value to the owners
of business. The surplus assets / non-operating assets are also adjusted.
• In case of free cash flows to equity, the cash available for
distribution to owners of the business is discounted at the Cost of Equity and the value
so arrived is the Equity Value before surplus/ non-operating assets. The surplus assets /
non-operating assets are further added to arrive at the Equity Value.
8.3 Market Approach
i. Market Price Method
• Under this approach, the market price of an equity share as
quoted on a recognized stock exchange is normally considered as the fair value of the
equity shares of that company where such quotations are arising from the shares being
regularly and freely traded. The market value generally reflects the investors'
perception about the true worth of the company.
ii. Comparable Companies Multiple Method
• Under the Comparable Companies Multiple ("CCM")
method, the value is determined on the basis of multiples derived from valuations of
comparable companies, as manifest through stock market valuations of listed companies.
This valuation is based on the principle that market valuations, taking place between
informed buyers and informed sellers, incorporate all factors relevant to valuation.
Relevant multiples need to be chosen carefully and adjusted for differences between the
circumstances.
• To the value of the business so arrived, adjustments need to be
made for the value of contingent assets/liabilities, surplus Asset and dues payable to
preference shareholders, if any, in order to arrive at the value for equity shareholders.
iii. Comparable Transactions Multiple Method
• Under the Comparable Transactions Multiple ("CTM"),
the value of a company can be estimated by analysing the prices paid by purchasers of
similar companies under similar circumstances. This is a valuation method where one will
be comparing recent market transactions in order to gauge current valuation of target
company.
8.4 Conclusion on Valuation Approach
| Sr. No. |
Valuation Approach |
Valuation Methodology |
Used |
Explanation |
| I |
Cost Approach |
- Net Asset Value & Break Up Value |
No |
NAV does not capture the future earning potential of the
business. |
| II |
Income Approach |
- Discounted Cash Flow |
Yes |
The project under the Company derives its true value from the
potential to earn income in the future. Hence, we have considered DCF method under Income
Approach for Valuation. |
| III |
Market Approach |
- Market Price |
No |
The Company is not listed on any stock exchange, therefore we
have not considered market price method of valuation. |
|
|
- Comparable Companies |
No |
There are no listed companies directly comparable to the
business of the InvIT Asset considering the nature of operations, capital structure and
the type of asset held. Hence, we have not considered CCM method. |
|
|
- Comparable Transactions |
No |
Due to unavailability of transactions in the public domain
with business and characteristics similar to the Company. |
• Accordingly, in the instant case, the Discounted Cash Flow
Method was considered as the most appropriate method for valuation of the InvIT Asset.
Under the DCF method, we have used Free Cash Flow to Equity ("FCFE") model for
valuation.
9 Valuation of InvIT Asset
9.1 Key Factors Impacting Valuation
9.1.1 The business of the Company is natural gas transportation, hence
natural gas volumes transported and tariff of the gas are the main value drivers for the
business.
9.1.2 For assessing the volumes to be transported through the Pipeline
we have relied on technical report provided by Wood Mackenzie. Wood Mackenzie is a global
energy, chemicals, renewables, metals and mining research and consultancy group. Wood
Mackenzie was engaged by an affiliate of the Sponsor in connection with Commercial Due
Diligence of the Pipeline.
The second major factor is Tariff for gas transportation, which is
fixed by PNRGB and revised every five years. The tariff rate is fixed on the basis of
future estimated volumes and total expenditure to be incurred by the firm in 25 years
since commercial operations. Current tariff is INR 71.66/mmbtu as determined by PNGRB vide
its order dated March 12, 2019 which has been considered for the projected period.
9.2 DCF Method:
9.2.1 The value of the InvIT Asset is based on the cash flow of PIL.
9.2.2 The audited balance sheet position of PIL as on March 31, 2021
has been considered as the opening balance sheet of PIL for the purpose of valuation.
9.2.3 The financial projections as provided by the IM for period
starting from April 1, 2021 to March 22, 2039 has been considered for valuation.
9.2.4 Following are the key assumptions considered in the financial
projections while determining the operating cash flows of PIL:
i. Volumes:
• The gas transportation volume is based on the Wood Mackenzie
Report dated March 23, 2021 provided by IM to estimate the production of natural gas that
could be transported through the Pipeline.
• The primary source of production of natural gas considered in
the Wood Mackenzie Report is from the KG basin from discovered resources. Additionally,
the Wood Mackenzie Report also provides estimates of production volumes from yet to find
resource. Further the excel working provided by Wood Mackenzie also provides some LNG
volumes expected to be flown in the PIL pipeline from west coast terminals and also some
additional technical reserves in KG Basin. We have considered 100% of production volumes
estimated from discovered resources and LNG volumes and 50% of production volumes
estimated from yet to find resources and technical reserves for the volume projections of
gas transportation through the Pipeline based on the assumption that once production from
existing and upcoming fields goes down, there would be new gas explorations in Krishna
Godavari Dhirubhai 6, ONGC, etc. fields in the east coast of India. Further the volume
data provided in the excel file is based on calendar year basis. For the purpose of this
exercise, the same has been proportionally apportioned to arrive at annual volume for
March ending financial year basis.
ii. Tariff for Gas Transportation:
The tariff rate currently charged to the customers is INR 71.66/mmbtu
which was fixed by PNGRB vide order date March 12, 2019.
iii. Working Capital
• The amount of inventory is estimated to be maintained at the
same level as existing on March 31, 2021. The working capital days outstanding estimated
for key items is as follows:
- Debtors - 15 days of annual revenue
- Current liability for Gas consumption and operating expenses - 90
days of annual gas and operating cost
iv. Capital Expenditure
• Based on discussions with the Management, we understand that a
mid-life overhaul and full-life overhaul of Gas Turbines, compressors, fuel management
systems, Gas Engine Generators and upgradation and replacement of various plant and
machinery components shall be required due to obsolescence and deterioration. Accordingly,
a yearly capital expenditure of INR 2,000 Mn annually from FY 2030-31 to FY 2038-39 for
upkeeping of the Pipeline has been considered.
v. Interest and Debt Repayment
• PIL has issued Redeemable, Secured Non-Convertible Debentures ("New
NCDs") to third party with face value of INR 64,520 Mn on April 23, 2019. The New
NCDs have a credit rating of AAA. The fair value of these New NCDs as reported in the
audited financials of the Company is INR 64,520 Mn.
• The New NCDs have a coupon rate of 8.95% payable quarterly. The
New NCDs have a redemption period of 5 years from issue date.
• We understand from the Management that for the purpose of
redemption of New NCDs, PIL will refinance the loan after ~3 years i.e. after March 31,
2024 and thereafter as per information provided by the Management, the New NCDs are
assumed to be repaid within a period 15 years. The interest rate on refinancing of New
NCDs is assumed to be 8.21% based on expected future interest rate for a period of 15
years for a AAA rated bond using FIMMDA Corporate Spread.
• Further as on Valuation Date, PIL has outstanding Redeemable
Non-Convertible Debentures issued to InvIT ("InvIT NCDs") of INR 59,939
Mn. The fair value of these InvIT NCDs as reported in the audited financials of the
Company is INR 74,244 Mn.
• The outstanding InvIT NCDs are to be repaid over a tenure of 20
years from the issue date as per the terms provided in DTD Agreement.
• The payment of interest and principal component of the InvIT
NCDs is provided in the DTD Agreement wherein interest component will be computed on the
outstanding principal of Total NCDs (i.e. InvIT NCDs + New NCDs). For first five years
upto March 31, 2024, the coupon rate is fixed at 9.7%. For the balance period the coupon
rate has been determined based on the Fixed Income Money Market and Derivatives
Association (FIMMDA) rates as on the Valuation Date. Accordingly, the coupon rate for
balance period is considered at 9.5%. From such interest component, first the payment will
be made for interest payable to the New NCDs and balance interest shall be paid to InvIT
NCDs. Similar approach is adopted for payment of principal portion of the Total NCDs.
vi. Terminal Year Cash Flow
• For the terminal period, a terminal growth rate of 1% has
been applied on EBITDA based on projected industry outlook and overall outlook of the gas
flow. Due to release of working capital, no working capital has been assumed in the
terminal period on a conservative basis. Capital expenditure for terminal period has been
estimated equal to INR 2,000 Mn required for up keeping the Pipeline.
• Further, PIL has issued Compulsory Convertible Preference Shares
("CCPS") and Redeemable Preference Shares ("RPS"). As
per the terms of the Transaction Documents, the value and cash flows to CCPS and RPS is
attributable after the end of explicit period i.e. March 22, 2039 and accordingly, the
value of CCPS and RPS as per the terms of the Transaction Documents has been adjusted from
the Terminal Value.
• Corporate income tax in the explicit period has been considered
as per the current tax laws applicable in India @ 25.2%.
• The cash flows of PIL post all the aforesaid adjustments has
been discounted to present value at Cost of Equity.
vii. Discounting Factor
• We have used the Free Cash Flows to Equity ("FCFE")
model under DCF method to estimate the equity value of InvIT Asset. In FCFE, the free cash
flows available are discounted by Cost of Equity ("CoE") to derive the
net present value.
• The CoE has been calculated as per the Capital Asset Pricing
Model based on the following parameters:
- Cost of equity = Risk Free Rate + [Beta X Equity Risk Premium] +
Company Specific Risk Premium
- The risk-free rate of return is based on yields of 10-year zero
coupon bond yield as on March 31, 2021 as listed on www.ccilindia.com. In the present
case, the risk-free rate of return is arrived at 6.7%.
- Market Return is a measure of rate of return that investors earns
by investing in equity markets. It is calculated based on the average historical market
return. In the present case, the market return is considered at 15%.
- Risk premium is a measure of premium that investors require for
investing in equity markets rather than bond or debt markets. A risk premium is calculated
as follows:
Risk premium = Equity market return (Rm) - Risk free rate (Rf)
In the present case, the risk premium is arrived at 8.3%.
- Beta is a measure of systematic risk of the company's stock
as compared to the market risk as a whole. Beta of 1.22 considered for determination of
CoE is based on unlevered beta of broad comparable companies (Refer Annexure II) in
the listed space operating in similar sector and relevered with a target long term
debt-equity ratio of 1:1.
• Based on above, the base cost of equity is arrived at 16.9%.
• There is uncertainty involved in achieving the future extraction
of projected gas volumes considering the historical performance of extraction of natural
gas, therefore, We have considered a company specific risk premium of 3%.
• Accordingly, the cost of equity is arrived at 19.9%.
9.2.5 The Management has informed us that contingent liabilities of
PIL, if any, and liability from various litigation in respect of the Pipeline are not
expected to materialize on PIL, hence no adjustment has been made in the current
valuation.
9.2.6 The cash and cash equivalent (including advance tax receivable)
of PIL as on the Valuation Date is INR 6,525.2 Mn.
9.2.7 The present value of cash flows (including cash and cash
equivalent) to shareholders before net cash flows accruing to RIL as per the Transaction
Documents is arrived at INR 77,731.1 Mn.
9.2.8 The fair value of net debt/ liability in the books of PIL as on
the Valuation Date amounts to INR 1,32,239.0 Mn.
9.2.9 PIL and RIL have entered into a PUA, in order to set out the
terms for RIL to reserve transportation, storage or other capacity in the Pipeline for a
period of 20 years. The PUA is executed on March 19, 2019. The PUA inter alia
provides for the following:
• RIL to pay contracted capacity payments to PIL on a quarterly
basis for the capacity booked determined in accordance with the PUA. The contracted
capacity payments shall be paid only when the actual transportation charges payable for
the actual quantity transported is less than the contracted capacity payments. Such net
accumulated contracted capacity payments shall be adjusted in the quarters where the
actual transportation charges payable for the actual quantity transported is more than the
contracted capacity payments.
• In consideration of RIL reserving the capacity in the Pipeline
and making the payment on account of contracted capacity payments to PIL, RIL is entitled
to receive certain cash flows, subject to deduction of taxes by PIL as per applicable law.
The mechanism for computing the cash flow and payment of the same to RIL is provided in
the PUA.
• The payment of such cash flows shall be made in the Financial
Year when the actual transportation charges received by PIL in a Financial Year is higher
than the contracted capacity payments during the Financial Year.
9.2.10 In addition, PIL and RIL amongst other have entered into PIL SHA
through which RIL has the option to buy the entire equity shares held by the Trust in PIL
at the option trigger date which for the current purpose has been considered as 20 years
from the completion date which ends on March 22, 2039. Accordingly, in case the terminal
value as on March 22, 2039 materially exceeds the purchase consideration for the equity
shares then such value shall also accrue to RIL.
9.2.11 Based on above, the fair enterprise value of InvIT Asset
considering the fair value of Net Debt and after reducing the net cash flow accruing to
RIL pursuant to the agreed terms of the Transaction Documents is arrived at INR
1,38,559.9 Mn (Refer Annexure lA).
10 Valuation Summary
10.1. The current valuation has been carried out based on the valuation
methodology explained herein earlier. Further, various qualitative factors, the business
dynamics and growth potential of the business, having regard to information base,
management perceptions, key underlying assumptions and limitations, were given due
consideration.
10.2. We would like to highlight that in the ultimate analysis,
valuation will have to be tempered by the exercise of judicious discretion and judgment
taking into account all the relevant factors. There will always be several factors, e.g.
quality of the management, present and prospective competition, yield on comparable
securities and market sentiment, etc. which are not evident from the face of the balance
sheets but which will strongly influence the worth of an entity or business.
10.3. The fair enterprise value of InvIT Asset pursuant to the agreed
terms of the Transaction Documents is arrived at INR 1,38,559.9 Mn.
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