By Harsha Sodhani

India Ratings and Research (Ind-Ra) has rated Hindustan Petroleum Corporation Limited’s (HPCL) proposed non-convertible debentures (NCDs) as follows:


Instrument Type

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)*

Rating

Rating Action

Proposed NCDs

-

-

-

-

INR20,000

Provisional IND AAA/Stable

Assigned

* The final rating will be assigned following the final issuance and the receipt of the final documentation, conforming to the information already received by Ind-Ra.

HPCL plans to issue NCDs worth INR5,000 million with a greenshoe option of up to INR15,000 million to fund its capex .

Analytical Approach: Ind-Ra continues to take a consolidated view of HPCL and its subsidiaries and joint ventures on account of the strategic importance of the subsidiaries and the joint ventures in supporting HPCL’s fuel retailing and marketing operations.

KEY RATING DRIVERS

Strong Linkages with GoI: The ratings continue 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., The ratings factor in HPCL’s strong parentage through majority ownership via Oil and Natural Gas Corporation Ltd (ONGC) (51.11%) and its strategic importance to the government of India (GoI), given the company’s role as the GoI’s extended arm for policy implementation, as reaffirmed in the recent move by the GoI instructing oil marketing companies to absorb INR1/litre towards the petrol and diesel price cut announced on 4 October 2018.

HPCL operates three refineries (including the Bhatinda refinery of HPCL-Mittal Energy Limited (HMEL; 48.9% joint venture; ‘IND AA’/Positive), which had a combined capacity of 27.1 million metric tons (mmt) and a sales volume of 36.9mmt (domestic sales volume: 36.3mmt) in FY18, translating into a market share of about 10.9% and 17.7%, respectively. The company has 15,062 retail outlets (24.06% market share) and a pipeline capacity of 3,371km (12.5% share in crude and product pipeline by length).

Ind-Ra expects the GoI to continue to support HPCL, given its significant position in the oil and gas sector, Furthermore, HPCL’s linkages with the GoI remain strong, despite the fuel reforms, as HPCL continues to sell liquefied petroleum gas and kerosene at lower than market prices, although the under-recovery has reduced. The linkages could be re-assessed if there are further fuel reforms in LPG and kerosene, and/or if oil marketing companies are able to sustain pricing freedom for decontrolled products. In addition, Ind-Ra believes that any deterioration in ONGC’s credit profile may also have a bearing on HPCL.

Improvement in Gross Refining Margins: Gross refining margins 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 undertook various measures such as debottlenecking of the Mumbai refinery (+1mmt), upgrade of refineries to process heavier crude variants and implementation of energy efficiency processes. The measures led to an improvement in distillate yield and fuel and loss percentage to 75.87% and 7.15% in FY18, respectively (FY17: 75.8%, 7.26%).

Growth in Marketing VolumesHPCL’s marketing volumes (including exports) grew 4.8% yoy to 36.9mmt in FY18. During the year, domestic sales volumes rose 4.4% yoy to 36.3mmt, but lagged behind the country’s consumption growth of 5.3% in petroleum, oil and lubricants. The company lost its market share of petrol and diesel and maintained its market share in the domestic market in FY18. Despite fierce competition, HPCL was able to broadly maintain its market share at 17.7% in the domestic petroleum, oil and lubricants consumption in FY18 (FY17: 17.9%).

Overall, the marketing segment remained healthy in FY18, led by growth in sales volume and continued absence of net under-recovery. However, it is likely to have been under pressure in FY19 in view of the recent government intervention in petrol and diesel prices. In Ind-Ra’s opinion, 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 remain high.


Future Growth Drivers: HPCL plans to incur capex of about INR960 billion over FY19-FY24 on expanding refinery capacity, meeting new emission standards, improving yields and 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 joint venture with the Rajasthan government. Its current capacity enhancements and upgrade projects in Mumbai (up 2.0mmt to 9.5mmt) and Visakhapatnam (up 6.7mmt to 15.0mmt) will complete by FYE20 and FYE21-FYE22, respectively, boosting its refining capacity by 54.0% and driving the next leg of gross refining margin expansion. Ind-Ra believes HPCL will be able to maintain its domestic fuel refining and retailing market share through the timely implementation of these projects.

Improved, Although Moderate, Financial Profile: HPCL’s credit metrics remained stable in FY18, as indicated by a net leverage (net adjusted debt/ operating EBITDA) of 1.4x (FY17: 1.3x) and a 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 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 joint ventures 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 have remained moderate in FY19 and to remain the same in FY20, with net leverage rising to 2.0x-3.0x during the period in view of the capex plans and the modest operating profitability.

Strong Liquidity: HPCL’s cash and cash equivalents stood at INR51.2 billion at FYE18. 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 in the next few years in view of higher crude prices. The substantial capex is likely to result in a negative free cash flow and a higher debt over the next few years.

Ind-Ra believes HPCL has strong financial flexibility, given its access to diversified sources of funding. Hence, it is well placed to partly refinance the maturing loans over the next few years. About 33% of the outstanding term debt at FYE18 matures over FY19-FY20. Furthermore, the company has commercial paper lines totalling INR150 billion and fund-based working capital lines totalling INR222.5 billion, of which only 10% and 34.15% remained utilised as on 31 March 2018, respectively. The unutilised lines provide 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, and/or any material deterioration in ONGC’s credit profile could lead to a negative rating action.



COMPANY PROFILE

HPCL is a public sector undertaking that operates as a refinery and oil marketing company. The company had an annual turnover of over INR2.4 trillion in FY18 (FY17: INR2.1 trillion). It 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)

2,442.6

2,142.2

EBITDA (INR billion)

120.3

131.3

EBITDA margin (%)

4.9

6.1

Net leverage (x)

1.40

1.29

Source: HPCL, Ind-Ra 


RATING HISTORY

 

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Current Rating

22 November 2018

11 October 2017

28 September 2016

Issuer rating

Long-term

-

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

Commercial paper

Short-term

INR150,000

IND A1+

IND A1+

IND A1+

-

Proposed NCDs

Long-term

INR20,000

Provisional IND AAA/Stable

-

-

-

Working capital limits

Long-/short-term

INR450,000

INDAAA/Stable/IND A1+

INDAAA/Stable/IND A1+

INDAAA/Stable/IND A1+

-

ANNEXURE

Instrument Type*

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating

Rating Action

Commercial paper

INE094A14DN5

28 February 2019

6.5-7.5

5 April 2019

INR2,000

IND A1+

Affirmed

Commercial paper

INE094A14DQ8

6 March 2019

6.5-7.5

29 April 2019

INR13,000

IND A1+

Affirmed

Commercial paper

INE094A14DR6

6 March 2019

6.5-7.5

23 April 2019

INR8,000

 

IND A1+

Affirmed

 

* Details are as of 31 March 2019. The balance of INR127,000 million was unutilised as of 31 March 2019.


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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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. 

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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