INSUBCONTINENT EXCLUSIVE:
Fitch Ratings today assigned 'BBB-' rating with stable outlook to state-owned gas utility GAIL India saying its dominant market position is
complemented by its diversification into other business segments.
"GAIL's ratings are capped at 'BBB-', which is the rating of its parent,
the state of India," it said in a statement.
Fitch said it rates GAIL as an integrated utility considering its presence in both gas
transportation and marketing along with petrochemical and liquid-hydrocarbon businesses.
"We continue to assess the company in its current
form even though there have been reports about a potential separation of GAIL's gas-transmission and marketing businesses as there is no
official communication yet regarding this
Fitch treats this as an event risk and will review GAIL's credit profile if there is any change," the statement said.
Assumptions that
went into the rating include gas consumption growing by 5 per cent over the medium term, GAIL maintaining its current share in gas
transmission as well as gas marketing.
"GAIL's dominant market position in the regulated utility gas-transmission business, complemented
by its diversification into other business segments, and its healthy credit metrics support a 'BBB' standalone profile," Fitch said.
Listing
key drivers for the rating, Fitch said government ownership gives the company comfort of support of the sovereign if required.
Assessing the
socio-political implications of a default by GAIL as 'moderate', it said a default would be unlikely to severely disrupt GAIL's
gas-transmission service as long as the pipeline infrastructure remains intact, while there are other entities that could step in to
partially fill the natural-gas marketing and supply gap.
"However, a default would derail investments in new pipeline projects
Fitch sees the financial implications of a GAIL default as 's trong' as it is one of the key state-owned borrowers in India and a financial
default may have a strong impact on the availability and cost of financing options for the state and other government-related entities," the
statement said.
The firm's rating benefits from its dominant position in the Indian gas industry with a nearly three-quarter share of the
gas transmission network and more than half of natural-gas sales.
With ongoing pipeline projects of more than 4,000 km likely to enhance
GAIL's market position over the medium term, Fitch expected the stable, non-cyclical, regulated gas-transmission business together with
gas marketing to continue to account for the majority of its profits over the medium term, driving stable cash flow generation.
On
regulatory environment, Fitch said there has been ongoing discussion to move away from multiple tariffs towards a unified/pooled tariff
applicable uniformly to all customers to ensure competitiveness of end-products or services of customers located further away along the
pipelines.
"The impact of the unified/pooled tariff on GAIL would depend on the final structure and implementation of the tariff
This proposal has also led to a delay in final tariff orders on some of GAIL's pipelines, which are due for a tariff review," it
said.
GAIL's expanded petrochemical business and its liquefied petroleum gas (LPG) and liquid-hydrocarbon segment add diversity to its
business profile although these businesses are inherently more volatile than the regulated gas-transmission business.
Its credit profile has
improved over the last two years with sound cash flow generation (and lower capex) used for reducing debt, leading to a drop in net
leverage, Fitch said adding GAIL's increasing focus on gas-pipeline expansion will raise its capex to Rs 6,600 crore in FY19 and Rs 8,500
crore in FY20.
Fitch said a downgrade of India's rating and a significant shift in GAIL's business profile would lead to negative rating
action.
GAIL's cash and cash equivalent balance rose to Rs 1,380 crore as of end-FY18 against current debt maturities of around Rs 11,300
crore.
"However, considering the increasing capex, we expect negative free cash flow generation for next two to three years
We expect GAIL to benefit from its sound access to domestic capital and bank loan markets," it added.
