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Rating Action:

Moody's downgrades GAIL's rating to Baa3; Outlook positive in line with sovereign's outlook

30 Sep 2016

Singapore, September 30, 2016 -- Moody's Investors Service has downgraded Gail (India) Limited's (GAIL) long term issuer rating to Baa3 from Baa2 due to the baseline credit assessment (BCA) being lowered to baa3 from baa2.

The rating outlook is positive, in line with the positive outlook on India's Baa3 sovereign ratings.

RATINGS RATIONALE

"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", says Abhishek Tyagi, a Moody's Vice President and Senior Analyst.

"GAIL's business model has been evolving from a predominantly regulated transmission business to one that consists of a rising share of cyclical business segments, especially petrochemicals and liquid hydrocarbon", says Tyagi, adding "As a result, we have lowered GAIL's BCA to baa3 from baa2 and correspondingly, its issuer rating was downgraded to Baa3 from Baa2".

Tyagi goes on to say "Prior to today's rating action, the previous rating was on negative outlook, partly reflecting these concerns".

"GAIL's Baa3 rating does not factor in any support uplift from the Indian government, given that its BCA of baa3 is at par with the sovereign rating of Baa3. Nevertheless, we believe there is a strong likelihood that the Indian government will provide extraordinary financial support if required, particularly in light of its 56.1% ownership of GAIL, and reflecting the key role that GAIL plays in the critical gas transmission sector".

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 petrochemical capacity has increased significantly with the commissioning of Pata II and Brahmaputra Cracker and Polymer Limited in FY2016. As a result, the capital employed in petrochemical business as a proportion of total increased to 42% in FY2016 from 8% in FY2013. GAIL's petrochemical capacity would further increase with the commissioning of 1.4 million metric tonnes per annum (MMTPA) complex in FY2017, under ONGC Petro-additions Limited (OPaL) in which it owns 15.5% equity stake.

While the expanding petrochemicals 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 petrochemical segment has varied from negative 37% to positive 30% over last three financial years.

The Baa3 rating reflects GAIL's dominant position in the gas transmission business, which provides support for the company's credit profile. GAIL's gas transmission network represents around 74% of the country's network and the company has around 71% market share in gas marketing.

Moody's also notes that GAIL is likely to face material challenges in marketing the Henry Hub linked LNG contracts, which will start kicking in from early 2018, in the scenario of low crude oil prices.

We expect GAIL's financial leverage as measured by FFO to Debt to be in the range of 24-30% over next 12-24 months, positioning it appropriately within the rating.

GAIL's rating could be upgraded if India's sovereign rating is upgraded and if GAIL's underlying credit quality remains in line with its current BCA of baa3.

GAIL's rating could be downgraded if its financial performance deteriorates arising from growth of its cyclical non-regulated business segments. 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 15% and debt/capitalization increasing to over 50% 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 Ratings Methodologies 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 over 11,000 km of natural gas pipelines, with a capacity to carry 206 million standard cubic meters per day (mmscmd) as of 30 June 2016. Its network accounts for approximately 74% of the gas transmitted in India.

In addition, it operates around 2,038 km of liquefied petroleum gas (LPG) pipeline, six LPG plants with a total production capacity of 1.1 million tonnes, and a 810,000-tonne per annum petrochemical facility. It was also participating in 13 E&P blocks in India and overseas as of 30 June 2016. Its main shareholders included the Indian government with 56.1%, while foreign institutional investors and other shareholders held the remaining shares, as of 30 June 2016.

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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

No Related Data.
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