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Related Issuers
Rating Action:

Moody's affirms GAIL's Baa2 rating; Outlook changed to negative from stable

20 Nov 2015

Singapore, November 20, 2015 -- Moody's has affirmed the Baa2 long term rating of Gail (India) Limited and changed the outlook to negative from stable.

RATINGS RATIONALE

"The change in outlook to negative reflects the rising share of GAIL's cyclical business segments, especially petrochemicals, which has higher business risk than the core gas transmission business", says Abhishek Tyagi, a Moody's Vice President and Senior Analyst.

"The rating action also considers the weakness in petrochemicals and liquid hydrocarbon segment and the resulting negative impact on the credit profile of GAIL", Tyagi adds.

We expect GAIL's credit metrics to weaken in the fiscal year ending 31 March 2016 (FY16) due to ongoing challenges faced by the petrochemical and liquid hydrocarbon segments because of falling profit margins.

"The expected weakness in performance will, if it persists, reduce the headroom within the rating to a level that may no longer be consistent with the Baa2 rating ", Tyagi says.

The recent doubling of Petrochemical capacity presents further challenges given the cyclical nature of this business. At present, the feedstock for GAIL's petrochemical plant is predominantly sourced from Petronet LNG Ltd (Baa3 stable) via a long term contract which is linked to a 5-year moving average of crude price. Such a pricing structure has been presenting challenges for GAIL because it is higher than current spot price which is reflective of the weak LNG market fundamentals. Moody's notes that the company's cost structure and overall financial performance will improve, somewhat, if there is a change in gas price setting mechanism for this contract.

The Baa2 rating affirmation reflects GAIL's dominant position in the gas transmission business, which provides support for the company's credit profile. GAIL's Baa2 rating corresponds to its baseline credit assessment (BCA) of baa2. Although the company is majority-owned by the Indian government, its rating does not incorporate any uplift from its BCA for potential support from the government because its BCA is higher than the sovereign rating of India (Baa3 positive).

We expect GAIL's financial leverage as measured by FFO to Debt to be in the range of 18-24% over next 12-24 months, positioning it weakly within the rating. This level compares to 30.3% and 24.5% for FY2014 and FY2015 respectively.

GAIL's rating could be downgraded if its financial performance does not improve over the next 12 months, or in the absence of countermeasures to offset the elevation of its business risk arising from the substantial growth in its petrochemical capacity. The rating could also be negatively pressured if the company makes aggressive debt-funded capex, including investments in the more risky Exploration & Production (E&P) business.

Similarly, downward pressure could develop owing to significant cash outflows to settle contingent liabilities or adverse regulatory changes. Ratios that Moody's would consider for a downgrade include FFO/Debt falling below 28-30% and debt/capitalization increasing to over 35% on a consistent basis

Upward rating movement is unlikely, given the rating is on negative outlook. However, the rating could revert to stable if FFO/Debt remains above 30% and Debt/Capitalization stays below 35% on a consistent basis.

The methodologies used in this rating were Regulated Electric and Gas Utilities published in December 2013, and Government-Related Issuers published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Established in 1984, the GAIL (India) Limited is the largest natural gas transmission company in India, with interests in transmission, distribution, processing, and upstream and downstream petrochemicals.

GAIL operates about 11,000 km of natural gas pipelines, with a capacity to carry 210 million standard cubic meters per day (mmscmd) as of 30 September 2015. Its network accounts for approximately 67% of the gas transmitted in India.

In addition, it operates around 2,050 km of liquefied petroleum gas (LPG) pipeline, six LPG plants with a total production capacity of 1.4 million tonnes, and a 810,000-tonne per annum petrochemical facility. It was also participating in 14 E&P blocks in India and overseas as of 30 September 2015.

GAIL's market capitalization was INR437 billion as of 20 November 2015. Its main shareholders included the Indian government with 56.11%, while foreign institutional investors and other shareholders held the remaining shares, as of 30 September 2015.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Abhishek Tyagi
Vice President - Senior Analyst
Project & Infrastructure Finance
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Terry Fanous
MD-Public, Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's affirms GAIL's Baa2 rating; Outlook changed to negative from stable
No Related Data.
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