Fitch affirms ‘BBB-‘ rating to GAIL, outlook stable

Fitch Ratings has affirmed a ‘BBB-‘ rating to gas utility GAIL (India) Ltd, with a stable outlook, on premise that the firm’s financial profile will remain strong.

Its rating is capped by the Indian sovereign rating of ‘BBB-‘. The government owns 51.52 per cent in GAIL. “GAIL’s standalone credit profile (SCP) is ‘bbb’, supported by its dominant market position in the regulated utility gas-transmission business, diversification into other business segments, and healthy credit metrics,” Fitch said. GAIL is India’s largest gas transmission and gas marketing company, with a 14,502-kilometre gas pipeline network and capacity of 206 million standard cubic metres a day. Its natural gas pipeline network covers 21 states.

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It has also increased its integration along the natural gas value chain into downstream segments, like petrochemicals, LPG and other liquid hydrocarbons. “We expect GAIL’s cash flow from operations (CFO) to be strong at around Rs 10,000 crore a year in the near to medium term, compared with around Rs 9,600 crore in financial year ended March 2022 (FY22). “CFO will be supported by growth in the gas transmission business, which benefits from regulated returns, and cash flow from its other business segments,” the rating agency said.

With ‘strong’ state linkage, Fitch believes the socio-political implications of a GAIL default are ‘moderate’, as it would be unlikely to severely disrupt the company’s gas-transmission service as long as the pipeline infrastructure was maintained. It expected GAIL’s CFO to remain stable, benefitting from its diversified business segments. Cash generation will benefit from its under-construction gas pipelines once commissioned under the regulatory tariff mechanism. “We expect higher feedstock prices to put some pressure on GAIL’s petrochemical, LPG and liquid hydrocarbon segments’ EBITDA, but contribution from these businesses will remain positive and add to GAIL’s overall cash generation,” it said.

GAIL’s gas-marketing segment is expected to benefit from high crude oil and spot LNG prices in FY23. Fitch expected ongoing pipeline projects to enhance GAIL’s dominant market position over the medium term, which supports its rating. “The stable, non-cyclical and regulated transmission business will remain the key operating-income contributor, driving cash flow predictability,” it said. GAIL holds around 70 per cent share of the gas-transmission network and more than 50 per cent share of natural gas sales in India.

Fitch expects GAIL’s financial profile to remain strong. Capital expenditure for expanding the gas pipeline network and petrochemical segments is likely to keep GAIL’s overall spending high at around Rs 8,300 crore a year over FY23-FY26 (FY22: Rs 7,000 crore). Fitch expects shareholder returns, including through share buybacks, to remain high at around 60 per cent of the previous year’s net income over the next three to four years (FY22: 65 per cent).