RPT-Fitch Affirms India's GAIL at 'BBB-'; Outlook Stable
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Oct 17 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed India-based GAIL (India) Limited's (GAIL) Long-Term Foreign-Currency Issuer Default Rating (IDRs) at 'BBB-'. The Outlook is Stable.
GAIL's ratings are constrained by that of its majority shareholder, the Indian state (BBB-/Stable).
KEY RATING DRIVERS
Dominant Natural Gas Player: GAIL's rating benefits from its dominant position in the Indian gas industry with a more than 70% share of the country's transmission network and a more than 50% share of the gas marketing sector. In FY13, the company transported 105 million standard cubic feet per day (mmscmd) through its network and marketed 81mmscmd. The gas business accounts for more than 50% of GAIL's EBIT.
Affected by Declining Domestic Gas Production: India's domestic natural gas production has fallen to 111mmscmd in FY13 from 143mmscmd in FY11. The falling domestic gas production volumes have resulted in GAIL's gas transmission volumes falling to 105mmscmd in FY13 and 99mmscmd in Q1FY14 from 118mmscmd in FY12. This has led to lower transmission segment revenue in FY13 of INR30.7bn (FY12: INR35.6bn) and EBIT of INR18.3bn (FY12: INR21.5bn). While the company's gas transmission business benefits from regulated revenues, the regulatory mechanism provides a per unit transmission charge, which exposes the company to risks related to swings in volumes transported.
Volumes in the gas marketing segment, however, remained broadly stable at 81mmscmd in FY13 (84mmscmd in FY12). Revenue in this segment increased to INR358bn in FY13 (FY12: INR301bn) due to the higher gas price (FY13: USD7/mmbtu compared with FY12: USD5.8/mmbtu) and currency depreciation. EBIT also increased to INR15.2bn (FY12: INR12.8bn) as the EBIT margin rose to USD0.27/mmbtu (FY12: USD0.25/mmbtu).
Benefits from Rising LNG Imports: In the medium term, Fitch expects GAIL's transmission volumes to be augmented by increasing LNG imports as the capacity of India's regasification facilities is likely to increase from 18.6 million tonnes per annum (mmtpa) at FYE13 to 41 mmtpa by FYE16. Furthermore, in the long term, domestic gas production is likely to increase as the upward revision in domestic natural gas prices from April 2014 is likely to spur exploration and production.
Petrochemical Expansion: GAIL's petrochemical plant in Pata, Uttar Pradesh will double its capacity to 900,000tpa by end FY14. The company's 70% subsidiary Brahmaputra Cracker and Polymer Ltd's 280,000tpa plant and its 15.5% JV ONGC Petro-additions Ltd's 1.4mmtpa facility are also likely to be commissioned by end FY14. With these, Fitch expects the petrochemical operations, which entail higher risks relative to GAIL's traditional gas businesses, are likely to contribute to more than 30% of total EBIT by FY15, rising from 22% in FY13. The near doubling of gas prices is likely to impact profitability of this segment.
However, GAIL's gas-based petrochemical production yields significantly higher margins (EBIT margins of 40% in FY13) than that seen at non-gas based operators, giving it significant headroom to absorb the higher feedstock costs.
No Material impact from Rupee Depreciation: Although 40% of GAIL's debt is denominated in foreign currencies at FYE13, Fitch believes the company is insulated from the recent rupee depreciation. This is because it around 55% of its foreign-currency debt is hedged via derivatives and the rest is protected through a natural hedge.
Comfortable Credit Profile: GAIL has a comfortable credit profile with net leverage (Net Debt/ EBITDA) at less than 2.0x and interest coverage (EBITDA/gross interest) of 7.5x at FYE13. Fitch expects leverage to peak in FY14 at 2.2x, based on the company's investment plan and the resultant negative free cash generation through FY15. Its credit metrics are likely to improve thereafter, barring materially higher-than-expected investments. GAIL also has a robust liquidity position with cash balance of INR30.6bn at FYE13. GAIL's strong operating profile and its strong financial position support a strong 'BBB' category stand-alone credit profile.
Sovereign Linkages: Fitch assesses the linkages between GAIL and its 57.3% shareholder - the government of India - to be medium to strong. The Indian government uses GAIL as a tool to meet its socio-economic objectives as GAIL contributes to the subsidy on petroleum products. GAIL is also a strategically important entity given its dominant position in the natural gas industry. As such, GAIL's ratings are constrained by those of the sovereign.
Positive: Future developments that may, individually or collectively, lead to positive rating action include
-An upgrade of the sovereign rating.
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- A downgrade of the sovereign rating.
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