Global agency Moody's Investors Service downgraded the long-term issuer rating of Gail (India) to 'Baa3' from 'Baa2', but assigned 'positive' outlook on the state-run gas major.
Global agency Moody’s Investors Service downgraded the long-term issuer rating of Gail (India) to ‘Baa3’ from ‘Baa2’, but assigned ‘positive’ outlook on the state-run gas major.
Today’s downgrade follows lowering of Gail’s baseline credit assessment (BCA) to ‘Baa3’ from ‘Baa2’, Moody’s said.
“The rating downgrade reflects the continued growth in Gail’s cyclical business segments, which have a much higher business risk than its core gas transmission business,” Moody’s Senior Analyst Abhishek Tyagi said in a note.
“Gail’s business model has been evolving from a predominantly gas transmission business to petrochemicals and liquid hydrocarbon, as a result, we have lowered its BCA to ‘Baa3’ from ‘Baa2’ and its issuer rating downgraded to ‘Baa3’ from ‘Baa2’.”
“The previous rating was on negative outlook, partly reflecting these concerns,” he said, adding “the ‘Baa3’ rating does not factor in any support uplift from the government, given that its BCA of ‘Baa3’ is at par with the sovereign rating of ‘Baa3’.”
However, Moody’s believes that support of the government, which holds 56.1 per cent in it, will continue and “as a result, Gail’s rating outlook is positive, consistent with the outlook on the sovereign rating, indicating that the rating could be upgraded if the sovereign rating is upgraded.”
Gail’s petchem capacity jumped post-commissioning of the Pata II and Brahmaputra Cracker and Polymer in 2015-16. As a result, the capital employed in petchem business rose massively to 42 per cent in FY2016 from 8 per cent in FY2013.
Its petchem capacity would further rise with commissioning of 1.4 mmt complex in FY2017 under ONGC Petro-additions Limited (OPaL), in which it owns 15.5 per cent equity stake.
“While the expanding petchem and hydrocarbons business provides diversity, it also presents challenges given the cyclical nature of this commodity business, which is likely to be more volatile than its regulated transmission business. The reported EBIT margins for petchem segment has varied from negative 37 per cent to positive 30 per cent over last three financial years,” the rating agency said.
On the other hand, the ‘Baa3’ rating reflects its dominant position in gas transmission, which provides support for the company’s credit profile. Its gas transmission network represents around 74 per cent of the national network and it has around 71 per cent market share in gas marketing.
Set up in 1984, Gail is the country’s largest natural gas transmission company, with interests in transmission, distribution, processing, and upstream and downstream petchem. It operates over 11,000 km of gas pipelines, with a capacity to carry 206 mmscmd as of 30 June, giving it market share of 74 per cent.
It also operates 2,038 km of LPG pipeline, six LPG plants with a capacity of 1.1 mt, and a 8,10,000-tonnes per annum petrochemical facility. It is also participating in 13 E&P blocks in the county and overseas.