By Ankur Rustagi

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

Instrument Type

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

NCDs

INE094A08028

25 April 2019

8

25 April 2024

INR5

IND AAA/Stable

Assigned

 

The final rating has been assigned after the receipt of the final documents, including the debenture trustee deed, by the agency. The final terms and conditions are in line with the information already received by Ind-Ra, based on which the provisional rating was assigned.

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 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. The rating factors 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 earlier 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+’/Stable), which had a combined capacity of 27.1 million metric tonnes (mmt) and a sales volume of 38.7mmt in FY19, translating into a market share of about 10.9%. The company has 15,440 retail outlets (23.89% market share) and a pipeline capacity of 3,371km (12.1% 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.

Growth in Marketing Volumes: HPCL’s marketing volumes (including exports) grew 4.9% yoy to 38.7mmt in FY19 (Provisional). During the year, domestic sales volumes rose 4.7% yoy to 38.0mmt, higher than the country’s consumption growth of 2.7% in petroleum, oil and lubricants. Market share of HPCL in the domestic petroleum, oil and lubricants consumption marginally increased to 17.9% in FY19 (FY18: 17.7%). Overall, the marketing segment remained healthy in FY19, led by growth in sales volume and non under recovery burden sharing by HPCL. 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, if 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, increasing its pipeline network, city gas projects and petrochemicals complex. HPCL is also embarking on a 9mmt refinery 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%. Ind-Ra believes HPCL will be able to maintain its domestic fuel refining and retailing market share through timely implementation of these projects.

Strong Liquidity: At FYE19, HPCL’s standalone cash and cash equivalents and current investment in the form of GoI special bonds marginally increased to INR51.6 billion (FYE18: INR50.1 billion) and INR50.8 billion (INR50.0 billion), respectively. The company’s total debt increased to INR272.4 billion at FYE19 (FYE18: INR219.5 billion) with around 46.8% of the outstanding debt being forex denominated. 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 44.8% of the outstanding term debt of INR134.45 billion matures till FY21 with repayment of INR21.3 billion and INR39.0 billion due in FY20 and FY21, respectively. Its short-term borrowings increased to INR137.9 billion at FYE19 (FYE18: INR107.6 billion) on account of increased working capital requirements. The company has commercial paper lines totalling INR150 billion and fund-based working capital line totalling INR222.5 billion on which only 15.3% and 45.5% remained utilised at FYE19.

Decline in Gross Refining Margins in FY19: Gross refining margins (GRMs) for the refining segment reduced to USD5.0/bbl during FY19 (FY18: USD7.4/bbl), driven by i) reduced crack spread for petrol (reduction of USD2.0/bbl yoy) and ii) higher fuel and loss cost due to increased average crude price (FY19: USD70.2/bbl; FY18: USD57.5/bbl). Additionally, during FY19, the GRMs were supported by higher inventory gains of INR13.7 billion (FY18: INR8.5 billion) but were offset by forex loss of INR5.8 billion as compared to forex gain of INR3.2 billion in FY18. The above mentioned factors led to the decline in EBITDA margin to 4.2% in FY19 from 4.9% in FY18. The GRMs are likely to improve in FY20 driven by increasing crack spread on diesel supported by the International Marine Organisation’s regulations and normalisation of the petrol spreads, decline in specific energy consumption, improvement in crude sourcing mix. Crack spreads for petrol started improving from 4QFY19 from the lows of 3QFY19. However, the petrol spreads continue to be susceptible to the overall risk of lower petrol demand, driven by increased adoption of electric vehicles and use of alternatives such as compressed natural gas and liquefied natural gas.

Marginal Decline in Credit Profile: HPCL’s credit metrics marginally declined in FY19 as indicated by net leverage (net adjusted debt/operating EBITDA) of 1.9x (FY17: 1.4x) and gross interest coverage (EBITDA/gross interest expense) of 15.8x (19.5x), largely driven by i) significant ongoing capex (FY19: INR115.3 billion, FY18: INR67.7 billion), ii) continued high dividends (INR16.5 billion, INR27.9 billion), iii) increase in the subsidy receivable from the government (INR90 billion, INR37.1 billion) and iv) decline in EBITDA (INR115.7 billion, INR120.3 billion). HPCL’s credit profile is likely to see a marginal improvement in FY20, primarily driven by higher EBITDA generation on account of better GRMs. Ind-Ra expects the subsidy receivables to streamline and reduce with the GoI’s likely higher petroleum subsidy budget allocation for FY20. However, capex outflows for transition to Bharat Stage VI emission norms and expansion of refining capacity could prevent any meaningful decline in leverage.

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 INR2.7 trillion in FY19 (FY18: INR2.4 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

FY19

FY18

Revenue (INR billion)

2,742.6

2,186.5

EBITDA (INR billion)

115.7

107.1

EBITDA margin (%)

4.2

4.9

Net leverage (x)

2.0

1.6

Source: HPCL, Ind-Ra

 

 


RATING HISTORY

 

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Current Rating

10 April 2019

22 November 2018

11 October 2017

Issuer rating

Long-term

-

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

Commercial paper

Short-term

INR150

IND A1+

IND A1+

IND A1+

IND A1+

NCDs

Long-term

INR5

IND AAA/Stable

 IND AAA/Stable

-

-

NCDs

Long-term

INR15

IND AAA/Stable

Provisional IND AAA/Stable

-

-

Working capital limits

Long-term/Short-term

INR450

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

IND AAA/Stable/IND A1+

ANNEXURE

Instrument Type*

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating

Commercial paper

INE094A14DW6

21 May 2019

6.5-7.5

28 June 2019

INR10

IND A1+

Commercial paper

INE094A14DY2

10 June 2019

6.5-7.5

26 June 2019

INR5

IND A1+

Commercial paper

INE094A14DZ9

14 June 2019

6.5-7.5

25 July 2019

INR7

IND A1+

* Details are as of 25 June 2019. The balance of INR128 billion was unutilised as of 25 June 2019.


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.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Ankur Rustagi

    Senior Analyst
    India Ratings and Research Pvt Ltd 601-9 Prakashdeep Building 7 Tolstoy Marg New Delhi 110001
    +91 11 43567230

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121