Fitch confirms GAIL (India) with a negative outlook

Fitch Ratings Confirmed GAIL (India) Limited’s Long Term Foreign Currency Issuer Default Rating at “BBB-” with a Negative Outlook

New Delhi: Fitch Ratings has confirmed GAIL (India) Limited’s long-term default rating of foreign currency issuers at “BBB-” with a negative outlook.

The utility rating is capped at the same level as the Indian sovereign rating (BBB- / Negative), based on Fitch’s government-linked entities (GRE) rating criteria, and the negative outlook reflects the rating outlook. sovereign.

We rate GAIL’s Autonomous Credit Profile (SCP) at ‘BBB’, supported by its dominant position in the regulated gas transmission market, its diversification into other business segments and its sound credit metrics, said Fitch.

We expect EBITDA to increase by around 30% in the fiscal year ended March 2022 (FY22), after falling 6% in FY21. This is based on our forecast of a 6% rebound in India’s domestic natural gas consumption (EF21: -5.5%). We also expect higher dividend payouts and ongoing capital spending will drive Net Debt / EBITDA to 1.8x in FY24, from 1.1x in FY21, while remaining proportional to GAIL’s SCP.

“Strong” State Ties: Fitch considers GAIL’s state status, ownership and control to be “strong” due to its strategic importance in transporting gas to India. The government holds 51.45% of GAIL’s direct capital and appoints its board of directors. However, the company operates as a business entity. We rate the support case as “Strong”. Support has been scarce, given GAIL’s strong financial position, but the government provided a 40% capital grant out of the total $ 2 billion cost of a large pipeline project, Urja Ganga, indicating that support would be available if needed.

Strong state incentive to provide support: Fitch considers the socio-political implications of a GAIL default to be “moderate,” as it is unlikely to disrupt the company’s gas transmission service as long as it lasts. pipeline infrastructure is maintained. However, a default would affect new pipeline investments. Fitch believes that the financial implications of a default by GAIL are “strong” because it is a key public borrower. A default would affect the availability and cost of funding to the Crown and other ERGs.

Risks related to LNG prices in the United States: GAIL’s gas marketing segment faces price and volume risks in the context of its long-term contracts related to Henry Hub (HH) in the United States, as evidenced by the negative EBIT of INR 4.4 billion during FY21 (FY20: positive INR 26.4 billion). Spot prices for liquefied natural gas (LNG) in Asia are tied to crude, making it difficult for GAIL to fully mitigate the price risk on its US LNG volume linked to HH.

Part of the segment’s losses for fiscal year 21 is attributable to inventory losses recorded following the sharp correction in natural gas prices during the year. GAIL is also exposed to unhedged volumes in the face of weak demand and low spot gas prices, as evidenced by losses in FY 21. We expect the pressure on marketing margins to increase. Gas eases in FY22 as crude oil price estimates rise and gas demand rebounds from pandemic lockdowns. A steady increase in domestic gas consumption will also mitigate the US LNG volume risk over the next three years.

Improved FY22 EBITDA: Fitch expects EBITDA to improve by approximately 30% in FY22, driven by GAIL’s gas transportation and marketing segments. We expect GAIL’s transport volume to improve by around 6.5%, in line with a recovery in domestic gas consumption, leading to growth in transport EBITDA. We also expect higher crude oil prices to support a recovery in the gas marketing segment after losses in FY21. EBITDA is expected to moderate for the petrochemical segment, with the segment’s EBIT margin falling to around 12% (FY21: 15%).

Dominance in Natural Gas Transmission: Fitch expects ongoing pipeline projects to strengthen GAIL’s dominant position in the market over the medium term, which benefits the rating. The stable, non-cyclical and regulated transport activity is expected to remain the main contributor to operating income, promoting predictability of cash flows. GAIL owns around 70% of the gas transmission network and achieves more than 50% of natural gas sales in India.

Strong financial profile: Fitch expects GAIL’s financial profile to remain strong, with net leverage below 2.0x over the medium term (FY21: 0.8x), even with higher investments and dividends . The increasing attention to gas pipeline expansion and the town gas distribution segment is expected to keep investments at a high level, with cash outflows of INR 70 to 120 billion per year in fiscal years 22 at 24 (fiscal year 21: INR 57 billion). Investments fell in FY21 due to lower spending during lockdowns related to the pandemic. Fitch expects dividend distributions to increase and stay at around 50% of the previous year’s net income over the next three to four years (FY21: 24%).

Asset monetization: GAIL intends to explore the monetization of its pipelines through infrastructure investment trusts. We are treating this as event risk as the timing and pipeline details are uncertain. GAIL has informed that its previous plan to transfer its transmission pipeline assets to a wholly owned subsidiary and separate them from GAIL has been scrapped.

Publication date : 26-06-21

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