By Harsha Sodhani

India Ratings and Research (Ind-Ra) has affirmed Hindustan Petroleum Corporation Limited’s (HPCL) commercial paper (CP) programme as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating

Rating Action

CP

-

6.5%-8%

Up to 365 days

INR150,000

IND A1+

Affirmed

The proceeds are to be utilised for general corporate purposes.

Ind-Ra has taken a consolidated view of HPCL and its subsidiaries and joint ventures (JVs) while arriving at the rating owing to the strategic importance of the subsidiaries and JVs in supporting HPCL’s fuel retailing and marketing operations.


KEY RATING DRIVERS

Strong Linkages with GoI: The rating continues to reflect HPCL’s strategic importance in the domestic energy sector, its large albeit indirect sovereign ownership, and established brand name and position in the domestic oil refining and marketing business. Notwithstanding the change in the majority ownership in favour of Oil and Natural Gas Corporation Ltd (51.11% shareholding), HPCL continues to be of a strategic importance to the government of India (GoI), given the company’s role as the GoI’s extended arm for policy implementation.

HPCL operates three refineries (including Hindustan Mittal Energy Ltd (HMEL, 48.9% JV; ‘IND AA’/Stable) Bhatinda refinery) with a combined capacity of 27.1 million metric tonnes (mmt) and sales volumes of 36.9mmt (domestic volumes  36.3mmt) as of FY18, translating into a market share of around 10.9% and 17.7%, respectively. The company has 15,062 retail outlets (24.06% market share) and pipeline capacity of 3,371km (12.5% share in crude and product pipeline by length).

The agency expects the GoI to continue to support HPCL, given its significant position in the oil and gas sector, and the large capex being undertaken by HPCL to ensure energy security implementation. Furthermore, HPCL’s linkages with the GoI remain strong, despite the fuel reforms, as HPCL continues to sell liquid petroleum gas (LPG) and kerosene at lower than market prices, although the under-recovery has reduced. In accordance with Ind-Ra’s parent subsidiary criteria, the linkages could be re-assessed if there are further fuel reforms in LPG and kerosene. In addition, Ind-Ra would assess the ability of the oil marketing companies to maintain pricing freedom in decontrolled products in the wake of rising crude prices.   
 

Improvement in
GRMs: Gross refining margins (GRMs) for the refining segment improved to USD7.4/bbl in FY18 (FY17: USD6.2/bbl) driven by i) improved crack spreads for petrol (FY18: up USD1/bbl yoy) and diesel (up USD2.8/bbl yoy), ii) favourable inventory movement with refining segment inventory gains of INR5.79 billion in FY18 (FY17: INR11.95 billion), and iii) higher refinery capacity utilisation of 116% in FY18 (FY17: 113%). Over the last two years, HPCL has taken various measures such as debottlenecking of Mumbai refinery (up 1mmt), upgradation of refineries to process heavier crude variants and implementation of energy efficiency processes, leading to an improvement in distillate yield, and fuel and loss percentage to 75.87% and 7.15%, respectively, in FY18 (FY17: 75.8%, 7.26%). 

Growth in Marketing Volumes
HPCL’s marketing volumes (including exports) grew 4.8% yoy to 36.9mmt in FY18. During the year, domestic sales volumes grew 4.4% yoy to 36.3mmt, but lagged the country’s consumption growth of 5.3% in petroleum, oil, and lubricants (POL). The company lost market share of diesel and LPG, and gained maket share for petrol in the domestic market. Despite fierce competition, HPCL has been able to broadly maintain its market share at 17.7% in the domestic POL consumption in FY18 (FY17: 17.9%). Overall, the marketing segment remained healthy led by a growth in volumes and continued absence of net under recoveries in FY18. The agency believes HPCL will remain vulnerable to the risk of growing competition from private players and/or subsidy sharing or fuel price caps or inadequate and untimely price hikes on deregulated products, as oil prices continue to surge. 

Future Growth Drivers: HPCL has a planned capex of around INR960 billion over FY19-FY24 for refinery capacity expansion, meeting new emission standards and yield improvements, improving fuel-marketing infrastructure and increasing its pipeline network. HPCL is also embarking on a 9mmt refinery-cum-2mmt petrochemical project in Barmer through a 74:26 JV with the Rajasthan government. Its current capacity enhancements and upgradation projects in Mumbai (up 2mmt to 9.5mmt) and Visakhapatnam (up 6.7mmt to 15mmt) will complete by FY20 and FY21/FY22 respectively, boosting its refining capacity by 54% and driving the next leg of GRM expansion. Ind-Ra believes HPCL will be able to maintain its domestic fuel refining and retailing market share with timely implementation of these projects.

Improved, Although Moderate Financial Profile: 
HPCL’s credit metrics remained stable in FY18 as indicated by net leverage (net adjusted debt/ operating EBITDA) of 1.4x (FY17: 1.3x) and gross interest coverage (EBITDA/gross interest expense) of 19.48x (21.66x), largely driven by lower operating profitability (FY18: 4.9%, FY17: 6.2%). HPCL’s consolidated EBITDA declined to INR120.3 billion in FY18 (FY17: INR131.3 billion) as inventory gains tapered to INR8.51 billion (INR35.69 billion) and the share of contribution of subsidiaries and JVs declined to 10.9% (17.5%). The refinery shutdown at HMEL for about two months for carrying out the capacity expansion impacted HMEL’s profitability in FY18. Adjusted for inventory gains, core operational profitability remained largely stable at 4.5%-4.6%. Ind-Ra expects HPCL’s financial profile to remain moderate over FY19-FY20 with net leverage of 2.0x-3.0x due to its large capex plans and modest operating profitability. 

Strong Liquidity:
HPCL’s cash & cash equivalents stood at INR51.2 billion at end-FY18. The company reported positive cash flow from operations over FY15-FY18 (FY18: INR112.5 billion, FY17: INR101.2 billion on the back of a significant reduction in working capital due to lower inventory value as lower crude prices flowed through working capital, as well as subsidy receivable from the government following the deregulation of diesel prices. However, the agency estimates higher working capital requirements on the back of higher crude prices and a substantial capex is likely to result in negative free cash flow and higher debt over the next few years.

Ind-Ra believes HPCL has strong financial flexibility given its access to diversified source of funding, and hence, is well placed to partly refinance the maturing loans over the next few years. About 33% of the outstanding term debt at FYE18 is maturing over FY19-FY20. Further, the company has CP lines of INR150 billion and fund-based working capital lines of INR215.0 billion, of which only 10% and 36.7%, remained utilised as of 31 March 2018, respectively, providing sufficient cushion for any liquidity mismatches.

Exposure to Government Policies, Industry Cycles, Rising Competition:
HPCL remains vulnerable to government policies with regard to subsidy sharing and fuel price change, global refining margin cycle, crude price volatility, forex rates and rising competition in the domestic market.


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 is a public sector undertaking operating as a refinery and oil marketing company with an annual turnover of over INR2.4 trillion in FY18 (FY17: INR2.1 trillion). The company operates two major refineries in Mumbai (7.5mmt capacity) and Visakhapatnam (8.3mmt capacity) each, producing a wide variety of petroleum fuels and specialties. It holds an equity stake of 16.95% in Mangalore Refinery and Petrochemicals Limited, a state-of-the-art refinery located in Mangalore that has a capacity of 9mmt.

FINANCIAL SUMMARY

Particulars

FY18

FY17

Revenue (INR billion)

2442.6

2142.2

EBITDA (INR billion)

120.3

131.3

EBITDA margin (%)

4.9%

6.1

Net leverage (x)*

1.40

1.29

Source: Company, Ind-Ra 


RATING HISTORY

 

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

 

Rating Type

Rated Limits (million)

Current Rating

11 October 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/Stable

Working capital limits

Long-term/Short-term

INR450,000

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

-

-

*NCDs have been repaid as per FY18 Annual report. Details of NCDs are mentioned in the Annexure
    

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 level 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.

ABOUT INDIA RATINGS AND RESEARCH

About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies and project finance companies. 

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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

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121