By Ankur Rustagi

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

Instrument Type

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Long-Term Issuer Rating

 -

IND AAA/Stable

Affirmed

NCDs*

-

-

-

-

INR75

IND AAA/Stable

Affirmed

Working capital limits

-

-

-

-

INR450

IND AAA/Stable/IND A1+

Affirmed

Commercial paper*

-

-

-

-

INR150

IND A1+

Affirmed

NCDs#

-

-

-

-

INR100

IND AAA/Stable

Assigned

*Details in annexure
#Yet to be issued


Analytical Approach: Ind-Ra continues to take a consolidated view of HPCL and its subsidiaries and joint ventures, while assigning the ratings, on account of their strategic importance 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 the majority ownership by 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. The importance is reaffirmed by the pricing actions taken by the government of increasing the excise duty on petrol and diesel, which also impacted the marketing margins of oil marketing companies (OMCs).  

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 39.6mmt in FY20, translating into the oil refining market share of about 10.9%. The company had 16,476 retail outlets and 6,110 liquefied petroleum gas (LPG) distributorships as of 31 March 2020.

Fuel retailing in India has largely remained dominated by Indian Oil Corporation Ltd’s (
‘IND AAA’/Stable), Bharat Petroleum Corporation Ltd and HPCL. The recent government move to privatise one of the OMCs could alter the market structure. Ind-Ra will assess the linkages between the GoI and OMCs post the stake sale of Bharat Petroleum Corp and any policy level changes that accompany such sale including subsidy sharing mechanism. Ind-Ra will also assess if Indian Oil Corp and HPCL are to remain strategically important to the GoI to further its policies. In addition, any deterioration in ONGC’s credit profile may have a bearing on HPCL. Also, any change in the ownership of HPCL will lead Ind-Ra to assess the linkages between the GoI and HPCL.   

Credit Profile to Improve in FY21:
Ind-Ra expects HPCL’s credit profile to start improving from 2HFY21, primarily driven by a demand revival; inventory gains, given the sharp increase in crude prices from the March 2020 lows; and better gross refining margins (GRMs) due to the improvement in the crack spread of petrol and diesel. During FY20, HPCL’s net leverage (net adjusted debt/operating EBITDA) increased to 6.7x (FY19: 2.0x) and gross interest coverage (EBITDA/gross interest expense) reduced to 5.0x (14.7x). This was largely driven by a decline in EBITDA as the company incurred a high inventory loss of INR42.5 billion in FY20 (FY19: inventory gain of INR13.7 billion), forex losses of INR8.7 billion (INR6.3 billion) and a significant compression in the GRMs to USD1.0/bbl (USD5.0/bbl). The debt levels increased by INR152 billion in FY20 owing to i) a decline in the cash flow from operations to INR44.7 billion (FY19: INR73.0 billion); ii) a high capex of INR138.6 billion (INR113.4 billion) towards refinery upgradation & expansion; iii) subsidy outstanding of INR63.8 billion (INR90.0 billion); iv) continued high dividends of INR17.2 billion (INR16.5 billion); and v) investments in a joint venture of INR9.31 billion (INR7.34 billion). 

The EBITDA may rise from FY22 as the increased capacities (Mumbai up 2.0mmt to 9.5mmt and Vishakapatnam up 6.7mmt to 15.0mmt) begin to contribute. Moreover, as demand for petroleum products revives, the crack spreads are also likely to see an uptick, thus aiding leverage. The increase in leverage during FY19-FY20 was unlike the leverage increase witnessed during FY13-FY14 which was largely driven by the large subsidy burden that OMCs had to share. The current leverage is driven primarily by lower GRMs and higher capex.

Liquidity Indicator - Adequate:
At 1QFYE21, HPCL’s standalone cash and cash equivalents, and current investment in the form of GoI special bonds stood at INR104.3 billion (FYE20: INR54.6 billion). The company has short-term working capital limits amounting to INR450.0 billion, including USD1.75 billion revolving line of credit. HPCL also has INR15.0 billion short-term limits in triparty repo from Clearing Corporation of India Limited. The company’s average utilisation of the working capital limits during the 12 months ended June 2020 was 14%. HPCL’s total debt outstanding increased to INR434.2 billion at FYE20 (FYE19: INR281.9 billion) including lease liability of INR24.9 billion, although reduced to INR341.3 billion (excluding lease liability) at 1QFYE21, given the strong subsidy collections, improvement in sales volume and capex spending remaining subdued due to lower manpower availability. Of the total debt outstanding, around 59% was forex denominated. About 71.5% of the total outstanding debt comprises term debt with scheduled repayments of INR40.3 billion and INR7.3 billion in FY21 and FY22, respectively. Ind-Ra believes HPCL has strong financial flexibility, given its access to diversified sources of funding. HPCL has not availed the Reserve Bank of India-prescribed debt moratorium.

Faster-than-Expected Volume Ramp-up:
HPCL operations were significantly impacted during March-May 2020, due to the various restrictions imposed by the central and state governments. The demand for its key products i.e. petrol and diesel declined 40%-45% yoy during April 2020 with a gradual recovery to around 85% in June 2020. With the revival of economic activities, the management believes that HPCL should be able to achieve 95%-100% sales volume by 3QFY21. HPCL’s marketing volumes in FY20 increased 2.4% yoy to 39.6mmt while the refinery throughput stood lower at 17.2mmt (FY19: 18.4mmt) due to the planned shutdown of its Mumbai and Visakhapatnam refineries for the upgradation to BS-VI norms and revamp of secondary units in the Visakhapatnam refinery. HPCL also purchases refined products from HPCL-Mittal Energy Limited’s to the extent of 10.8mmt, which ensures total marketing sales is covered 70% from own and joint venture refinery operations. Given HPCL’s refinery output is lower than the total fuel retailing sales, the company could still run its refineries at above 100% capacity (FY20: 109%). However, post the refinery expansion, the dependence on external fuel purchases would decline to 7%-8%, thus lowering the flexibility enjoyed by HPCL; although HPCL will be able to capture a higher profit share of the crude-to-fuel value chain.

Marketing and Pipeline Segment Reduce Cash Flow Volatility:
Ind-Ra estimates the company’s  refining segment to have posted negative EBITDA in FY20 while marketing and pipeline segment posted EBITDA of INR70 billion-75 billion. Ind-Ra expects HPCL’s refining segment to benefit from the improvement in GRMs and volume ramp-up in the refinery coupled with the inventory gains. The company’s marketing segment would continue to benefit from the strong marketing margins as the OMCs have been able to increase the prices of petrol and diesel to ensure healthy margins, despite the reduction in margins seen post the implementation of the excise duty hike in May 2020. The company’s pipeline segment also continues to register steady revenue, EBITDA and cash flows, thus aiding profitability. Furthermore, the total subsidy receivable declined to INR63.8 billion in FY20 (FY19: INR90 billion) owing to a fall in the LPG under-recovery to INR12.4/kg (INR19/kg) and a decline in kerosene quantity and under-recovery to INR6/litre (INR 15/litre). The subsidy burden is likely to fall further in FY21, aiding cash flows and lowering the borrowing.

Refinery Operations to Become More Profitable:
HPCL is the midst of completing the refinery expansion projects at Mumbai and Vishakapatnam refineries and the total refining capacity is likely to go up by 54% to 24.5mmt. The management expects the Mumbai refinery expansion to be completed by FYE21 with a total capex of INR51 billion while the Vishakapatnam refinery is to be completed by FYE22 at a capital cost of INR262 billion. Both the projects have seen a time overrun from the earlier envisaged timelines of January 2020 and July 2020, respectively. The Vishakapatnam refinery project also involves refinery upgradation which would lower the production of bitumen and furnace oil, thus improving the distillate yield from 74.4% in FY20 (FY19: 76.0%). This would also improve HPCL’s Nelson Complexity Index, thus giving the company the flexibility to process more sour and heavy crudes. HPCL plans to incur INR130 billion capex in FY21 on expanding its refinery capacity, meeting new emission standards, and increasing its pipeline network, city gas projects and a petrochemicals complex. HPCL is also setting up a 9mmt refinery in Barmer through a 74:26 joint venture with the Rajasthan government. 


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 an OMC. The company had an annual turnover of over INR2.7 trillion in FY20 (FY19: INR2.7 trillion). It operates two major refineries, one each in Mumbai and Visakhapatnam, 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 9mmt refinery located in Mangalore.

FINANCIAL SUMMARY

Particulars (Consolidated)

FY20

FY19

Revenue (INR billion)

2,679.2

2,742.6

EBITDA (INR billion)

56.6

115.7

EBITDA margin (%)

2.1

4.2

Interest Coverage (x)

5.0

14.7

Source: HPCL, Ind-Ra

 

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

16 March 2020

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

INR175

IND AAA/Stable

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/Outlook

NCD

INE094A08028

25 April 2019

8

25 April 2024

INR5

IND AAA/Stable

NCD

INE094A08036

14 August 2019

7

14 August 2024

INR20

IND AAA/Stable

NCD

INE094A08044

15 October 2019

6.8

15 December 2022

INR30

IND AAA/Stable

NCD

INE094A08051

28 January 2020

6.38

12 April 2023

INR6

IND AAA/Stable

NCD

INE094A08069

6 March 2020

7.03

12 April 2030

INR14

IND AAA/Stable

Commercial paper**

INE094A14FR1

6 May 2020

4.85

28 July  2020

INR12

IND A1+

 ** Details are as of 21 July 2020. The balance of INR138 billion was unutilised as on 21 July 2020.


COMPLEXITY LEVEL OF INSTRUMENTS

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

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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. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Ankur Rustagi

    Senior Analyst
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    0124 6687261

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121