By Harsha Sodhani

India Ratings and Research (Ind-Ra) has affirmed Hindustan Petroleum Corporation Limited’s (HPCL) Long-Term Issuer Rating at ‘IND AAA’. The Outlook is Stable. A full list of rating actions is at the end of this commentary.

Ind-Ra has taken a consolidated view of the financials of HPCL, including its subsidiaries and joint ventures (JVs). The subsidiaries have been fully consolidated and the JVs have been proportionately consolidated. Ind-Ra believes the subsidiaries and JVs are of strategic importance to HPCL as they support HPCL's fuel retailing and marketing operations.

KEY RATING DRIVERS

Strong Linkages with GoI: The ratings continue to reflect HPCL’s strong strategic and operating linkages with the Government of India (GoI), its majority stakeholder (51.1%). HPCL is among the top three public sector oil refining and marketing companies (OMCs) in India, with a refining market share of 10.3% (FY16: 23.8mtpa) and marketing market share of 19.3% (FY16: 34.2mtpa). The agency expects GoI to continue to provide support to HPCL, given its role as the government's extended arm for policy implementation. Ind-Ra believes that linkages remain strong despite the deregulation of diesel prices in October 2014 and the consequent decline in under-recoveries and budgetary support. Furthermore, HPCL continues to retail kerosene at government-determined prices (that are lower than market prices) and to that extent, relies on the subsidy sharing mechanism laid out by GoI.

Low Crude Price Supports Profitability:
HPCL’s gross refining margin (GRM) improved to USD6.7/bbl during FY16 (FY15: USD2.8/bbl) on the back of a fall in crude prices (brent crude averaged USD 47.6/bbl in FY16 as against USD 86/bbl in FY15), higher discounts on crude and superior product cracks (especially light distillates), supported by higher operational efficiency (capacity utilisation: FY16 116%; FY15: 111%). Its marketing margins improved due to the absence of net under-recoveries (FY15:  INR5bn), following the deregulation in diesel prices as well as low oil prices. The agency expects profitability to remain comfortable over the medium term despite moderation in GRMs, in line with industry trends, supported by HPCL’s high marketing exposure (refinery throughput to sales: 66% in FY16) along with an expansion in its marketing margin (currently about INR0.8-INR1/litre).

Moderate Financial Profile:
HPCL’s financial profile improved significantly in FY16, as indicated by net leverage (net debt/EBITDA) and gross interest coverage (EBITDA/interest expense) of 2.6x and 6.1x, respectively (FY15: 7.2x, 2.23x), largely driven by its doubling EBITDA (FY16: INR106bn; FY15: INR40bn). Lower inventory losses (FY16: INR27bn, FY15: INR56.5bn) together with a turnaround in the operations of HPCL-Mittal Energy Limited (HMEL; JV with a 48.9% stake; ‘IND AA-’/Stable) contributed to a sharp rise in HPCL’s EBITDA. Additionally, its net debt fell by INR18bn yoy to INR276.3bn in FY16 as lower crude prices led to lower working capital. Ind-Ra expects HPCL’s financial profile to remain moderate over the medium term, with net leverage (net adjusted debt/ operating EBITDAR) remaining above 3.0x due to its large capex plans and modest profitability.

Significant Capex Underway:
HPCL has planned large capex of INR520bn over FY17-FY21, the majority of which would be focused on refinery capacity addition and upgrades. Its refinery capacity is slated to increase to 24.5mtpa (from the current 14.8mtpa) over the next 4 years. HPCL has reported positive free cash flow (FCF) over the past two years (FY16: INR31.8bn, FY15: INR111.6bn) on the back of a significant reduction in working capital (due to lower inventory value) and subsidies from GoI (following the deregulation of diesel prices). However, the agency estimates that substantial capex is likely to result in negative FCF and higher debt over the next few years. HPCL is likely to benefit from the increase in its refining capacity and improvement in operational capabilities in the long term.

Turnaround in HMEL’s Performance:
HPCL’s consolidated metrics are further supported with HMEL turning profitable in FY16. HPCL’s share of profits in HMEL stood at about INR9bn for FY16 as against a loss share of INR8bn in FY15. HMEL’s performance improved in FY16, led by higher refinery throughput (FY16: 11mtpa, FY15: 7.5mtpa), better GRMs (FY16: USD11.8/bbl, FY15: negative USD1.9/bbl) and lower debt yoy (FY16: INR200bn, FY15: INR230bn). Ind-Ra expects HMEL’s operations to show sustainable improvement over the medium term, given the planned capacity expansion of 2.3mtpa (FY16: 9mtpa) for its refinery, along with its high Nelson complexity of 12.6, translating into higher margins.


RATING SENSITIVITIES

Negative: Any weakening of HPCL's linkages with GoI as deemed by Ind-Ra, could lead to a negative rating action.


COMPANY PROFILE

HPCL is a public sector undertaking operating as a refinery and oil marketing company with an annual turnover of over INR1.8trn in FY16 (FY15: INR2.1trn). HPCL has an about 20% market share in the marketing of refined oil products, underpinned by a strong distribution infrastructure with around 14,000 retail outlets.

HPCL operates two major refineries producing a wide variety of petroleum fuels and specialties. One is located in in Mumbai (West coast) with a capacity of 6.5mtpa and the other in Visakhapatnam (East coast) with a capacity of 8.3mtpa. HPCL holds an equity stake of 16.95% in Mangalore Refinery & Petrochemicals, a state-of-the-art refinery located in Mangalore that has a capacity of 9mtpa. HPCL also has 48.9% stake in a 9mtpa refinery at Bhatinda as a JV with HMEL.


HPCL’s ratings:
- Long-Term Issuer Rating: affirmed at ‘IND AAA’; Outlook Stable
- INR5,450m non-convertible debentures: ‘IND AAA’/ Stable; rating withdrawn as the instrument was repaid in full
- INR9,750m non-convertible debentures: affirmed at ‘IND AAA’/Stable



SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Harsha Sodhani

    Senior Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 22 40001792

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121