CRISIL?s ratings on GAIL (India) bond programmes continue to reflect GAIL?s dominant market position in the natural gas transmission and trading business in India, and the synergies among its various business segments. The rating also factors in the company?s healthy financial risk profile marked by strong profitability and financial flexibility, and the support it receives from the Government of India (GoI); GoI owns the majority (57 per cent) of GAIL?s equity shares. These rating strengths are partially offset by the expected increase in competition for GAIL, the company?s susceptibility to cyclicality in the petrochemical sector, and exposure to high inherent risks in the exploration and production (E&P) business and to significant implementation-related risks in its ongoing/planned projects.

GAIL is the leader in the transmission and trading of natural gas in India. It has a market share of about 72 per cent in the transmission business, and about 55 per cent in the trading business. The company benefits from the preference for natural gas as feedstock for fertiliser manufacture and power generation, and the availability of natural gas from the Krishna-Godavari basin (with more gas finds expected); CRISIL believes that GAIL is in a position to expand its business volumes significantly. The company also derives revenues from its liquefied petroleum gas (LPG) and petrochemical businesses, where it benefits from synergies arising out of use of natural gas as feedstock.

GAIL has a healthy financial risk profile, with a robust capital structure (gearing of around 0.3 times over the past four years). The capital structure is likely to weaken, given the company?s ongoing capital expenditure (capex) of around Rs.300 billion?the capex commenced in 2009-10 (refers to financial year, April 1 to March 31) and is expected to end in 2012-13. The capex is toward doubling GAIL?s pipeline infrastructure, and could result in a substantial increase in the company?s debt level. However, CRISIL believes that the stability in cash flows from GAIL?s existing transmission and trading business, and expectation of increased business volumes, partially offset the adverse impact of increased debt on its financial risk profile.

The Petroleum and Natural Gas Regulatory Board?s guidelines allow GAIL a 12 per cent post-tax return on capital employed; GAIL?s currently operational pipelines and its seven pipeline projects under implementation are covered under these guidelines. On account of new regulations, which mandate competitive bidding for future pipeline projects, and rules for common carrier access, CRISIL believes that competition is set to increase. GAIL?s petrochemicals business is cyclical, as prices are linked to crude oil prices, causing cyclicality in profits. Furthermore, the profitability in the LPG and liquid hydrocarbons business is dependent on the level of subsidy-sharing that is part of GoI?s policy on sharing of under-recoveries of oil marketing companies.

Outlook: Stable

CRISIL believes that GAIL will maintain its dominant position in the natural gas transmission and trading business. The outlook may be revised to ?Negative? if there is an increase in GAIL?s subsidy burden; or expansion plans that are significantly larger than those recently announced by GAIL.