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. The instrument-wise rating actions are as follows.

Instrument Type

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating

Rating Action

Non-convertible debentures (NCDs)*

-

-

-

INR9,750

IND AAA/Stable

Affirmed

Working capital limits

-

-

-

INR450,000

IND AAA/Stable/IND A1+

Assigned

Commercial paper (CP)#

-

4.5-7.5

1-365 days

INR150,000

IND A1+

Affirmed

* The details of the NCDs are mentioned in the Annexure.
# The proceeds from the CP programme are to be utilised for general corporate purposes.

KEY RATING DRIVERS

Strong Linkage with GoI: HPCL is among the top three public sector oil refining and marketing companies in India, with a refining market share of about 10.5% (FY17: 28.3 million metric tons (MMT)) and a marketing market share of 18.6% (FY17: 35.2MMT). The ratings reflect HPCL’s strong strategic and operational linkages with the government of India (GoI), the majority shareholder (51.1%). Although Oil and Natural Gas Corporation Ltd (ONGC), which is 68.94%-owned by the GoI, is likely to acquire the GoI’s entire stake in HPCL by end-2017, HPCL may continue to be controlled by the GoI through ONGC under the administrative control of the Ministry of Petroleum and Natural Gas. Ind-Ra expects the GoI to continue to provide support to HPCL, given the company’s role as the GoI’s extended arm for policy implementation.

Moderation in GRMs Offset by Marketing Profits: HPCL’s gross refining margins (GRMs) moderated to USD6.2/barrel (bbl) in FY17 (FY16: USD6.7/bbl), mainly on account of soft product cracks, particularly light distillates, despite an inventory gain of USD1.5/bbl in FY17, driven by a sharp rise in crude price towards FYE17 (FY17 average crude price: USD47.6/bbl; 4QFY17 average: USD 53.8/bbl; FY16 average: USD47.5/bbl). Marketing profits continued to improve in FY17 due to the absence of net under recoveries (FY16: INR0.08 billion; FY15:  INR5 billion) supported by 3% yoy growth in marketing volumes. The rise in EBITDA margin (FY17: 6.1%; FY16: 4.7%) was led by an inventory gain of INR35.6 billion in FY17 against a loss of INR26.9 billion in FY16, and the improved operating performance of Hindustan Mittal Energy Ltd (HMEL; 48.9% JV; ‘IND AA’/Stable).

Ind-Ra expects profitability to remain comfortable in the medium term, supported by stable GRMs in a benign crude price environment and a high marketing exposure, along with an expansion in its marketing margin. Moreover, the GoI’s recent move to eliminate subsidies on kerosene will aid in limiting gross under recoveries.

Improved, Although Moderate, Financial Profile: HPCL’s financial metrics continued to improve in FY17, indicated by a net leverage (net adjusted debt/operating EBITDA) of 1.3x (FY16 restated: 1.85x) and a gross interest coverage (EBITDA/gross interest expense) of 23.9x (13.2x). The improvement was largely driven by a rise in operating profitability. Also, net debt marginally reduced by INR1.2 billion to INR169 billion in FY17 despite the hardening of crude prices towards 4QFY17. Ind-Ra expects HPCL’s financial profile to remain moderate over the medium term, with net leverage standing at 2.0x-3.0x, in view of its large capex plans of INR421 billion over FY18-FY21 and modest operating profitability.

Strong Liquidity: HPCL’s cash and cash equivalents stood at INR52.3 billion at FYE17. The company reported positive cash flow from operations over FY14-FY17 (FY17: INR101.2 billion) on account of a significant reduction in working capital due to lower inventory value, as lower crude prices flowed through the working capital, as well as subsidy receivable from the government following the deregulation of diesel prices. However, the agency expects substantial capex to result in negative free cash flows and higher debt over the next few years. Ind-Ra believes HPCL has a strong financial flexibility, given its access to diversified sources of funding. Hence, HPCL is well-placed to partly refinance the maturing loans over the next few years.

Turnaround in HMEL’s Performance: 
HPCL’s consolidated metrics were further supported with HMEL turning profitable in FY16 and its continued improved operating performance in FY17. HPCL contributed INR15.7 billion to HMEL’s profits in FY17 (FY16 restated: INR6.8 billion; FY15: INR8 billion loss). The improvement in HMEL’s performance was led by higher refinery throughput, superior GRMs and lower debt. Ind-Ra expects HMEL’s operations to show a sustainable improvement over FY18-FY19, given a planned capacity expansion of 2.3MMT in 1HFY18 (FY16: 9MTPA) of its refinery and the translation of its high Nelson complexity of 12.6 into higher margins.


RATING SENSITIVITIES

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


COMPANY PROFILE

HPCL, a public sector undertaking, operates as a refinery and oil marketing company. HPCL has an 18.6% market share in the marketing of refined oil products, underpinned by a strong distribution infrastructure of about 14,500 retail outlets.

HPCL operates two major refineries in Mumbai (7.5MTPA capacity) and Visakhapatnam (8.3MTPA capacity) each, producing a wide variety of petroleum fuels and specialties. HPCL is undertaking planned refinery capacity expansion. The capacity will increase to 24.5MMT over the next three-four years from the current 15.8MMT.

HPCL holds an equity stake of 16.95% in Mangalore Refinery and Petrochemicals Limited, a state-of-the-art refinery in Mangalore that has a capacity of 9MTPA. Moreover, HPCL has a 48.9% stake in a 9MTPA refinery in Bhatinda through a joint venture with HMEL.


FINANCIAL SUMMARY

Particulars

FY17

FY16*

Revenue (INR billion)

2,142.2

1,979.6

EBITDA (INR billion)

131.3

92.2

EBITDA margin (%)

6.1

4.7

Net leverage (x)

1.29

1.85

Source: Company

* FY16 financials are restated


RATING HISTORY

 

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Current Rating

28 September 2017

28 September 2016

26 November 2014

Issuer rating

Long-term

-

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

CP

Short-term

INR150,000

IND A1+

IND A1+

-

-

NCDs

Long-term

INR9,750

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA

Working capital limits

Long-/short-term

INR450,000

IND AAA/Stable/IND A1+

-

-

-

ANNEXURE

Instrument Type

ISIN

Date of

Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating/Outlook

NCDs

INE094A07053

 

13 March 2013

 

8.77

13 March 2018

 

INR9,750

IND AAA/Stable


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

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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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