Fitch affirms ‘BBB-‘ rating at GAIL, outlook negative

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June 29, 2020 7:54 PM

On government considering a proposal to transfer GAIL's transmission pipeline assets to a wholly-owned subsidiary, Fitch said a majority stake sale in the proposed subsidiary is likely to be credit negative.

Fitch said a majority stake sale in the proposed subsidiary is likely to be credit negative.

Fitch Ratings on Monday said it has assigned ‘BBB-‘ rating with a negative outlook to state-owned gas utility GAIL India. The rating is capped at the same level as India’s sovereign ‘BBB-‘ rating, Fitch said in a statement. GAIL’s dominant market position in the regulated utility gas-transmission business, complemented by its diversification into other business segments, and healthy credit metrics were factors governing the rating.

“Fitch rates GAIL as an integrated utility, considering its presence in both gas transportation and marketing along with petrochemical and liquid-hydrocarbon businesses,” the statement said. Fitch said it expects the pandemic, which would affect natural-gas consumption in India, and market volatility including lower crude oil prices to reduce GAIL’s pre-tax profit in financial year 2020-21 by around 25 per cent.

“Lower EBITDA and our assumptions of an increase in capex and dividend payouts would cause GAIL’s net leverage to rise to 1.7x in FY21 from 0.8x in FY20,” it said. The rating agency said it assessed GAIL’s status, ownership, and control by the state as ‘strong’ due to its strategic importance in the Indian gas-transmission sector. The state also appoints its board. However, the company operates as a commercial entity.

“We expect all key segments of GAIL to be affected by the coronavirus in FY21, although operating performance should improve in FY22 to closer to pre-COVID-19 levels. We expect GAIL’s gas-transmission segment to be affected by lower natural gas demand in the country, which we expect to dip by 6 per cent in FY21,” it said. Also, liquid hydrocarbon and petrochemical segments would face volume and margin headwinds due to weakening demand in 2020, with gradual recovery through 2021.

“GAIL’s gas-marketing segment faces price and volume risks under its long-term Henry Hub (HH) linked contracts from the US, especially in the low crude price environment when spot liquefied natural gas (LNG) is cheaper than HH-linked US LNG. We expect GAIL to be able to mitigate volume risks by selling excess supply in the international market although current prices may lead to losses on unhedged volumes, which we estimate at 25 per cent of the US LNG supply in FY21,” it said.

On government considering a proposal to transfer GAIL’s transmission pipeline assets to a wholly-owned subsidiary, Fitch said a majority stake sale in the proposed subsidiary is likely to be credit negative. “The stake sale is unlikely to happen before 2022 as the gas market will not be mature before that and state support would be needed for GAIL to build a pipeline grid. However, Fitch continues to treat this as an event risk as the timing and details of the sale are uncertain,” the statement added.

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