Fitch Affirms Hindustan Petroleum at 'BBB-'; Outlook Stable
KEY RATING DRIVERS
Rating Equalised with Sovereign: Fitch equalises HPCL's rating with that of the state of India (BBB-/Stable), its largest shareholder with 51.1% stake, due to their strong operational and strategic linkages, in line with Fitch's Parent and Subsidiary Linkage methodology. Fitch believes the linkages remain strong despite the deregulation of diesel prices in 2014. HPCL continues to retail kerosene at government-prescribed prices that are lower than market prices, similar to other state-owned oil marketing companies, Indian Oil Corporation Limited (BBB-/Stable) and Bharat Petroleum Corporation Limited (BBB-/Stable).
Fitch may reassess HPCL's linkages with the state, if the state-owned oil marketing companies' policy role weakens due to further deregulation of prices for petroleum products. While assessing the linkages, Fitch will also consider the government's commitment to maintaining market-based prices for already deregulated products when oil prices increase.
Refining Margins to Narrow: We expect the HPCL's gross refining margin to narrow to around USD5 per bbl in FY17 and less than USD5 per bbl in FY18, which may reduce the company's profitability over the next two years. The company's gross refining margins improved to USD6.7 per barrel (bbl) during the financial year ending 31 March 2016 (FY16) (FY15: USD2.8 per bbl).
The stronger refining margin supported improvement in HPCL's EBITDA margin to 5.7% in FY16 (FY15: 2.2%). The wider margin was also helped by the absence of net under-recoveries - the gap between international prices and the regulated prices of certain petroleum products - during the year (FY15: INR5bn), which stemmed from India's oil subsidy reforms and low oil prices. HPCL's EBITDA margins also benefited from the improvement in the operations of 48.9%-owned HPCL Mittal Energy Limited (HMEL). HMEL posted EBITDA margin of around 18% in FY16 compared with EBITDA losses in previous years.
Large Capex: HPCL has planned large capex of INR430bn (USD6.5bn) over 2015-2020, with the majority focused on its refinery capacity addition and improvement (INR210bn), and the rest for marketing and other ventures. This large capex is likely to result in HPCL's free cash flows remaining negative and net debt levels increasing over the medium term. However HPCL is likely to benefit from increased refining capacity and capability in the long term.
Moderate Financial Profile: We expect HPCL's financial profile to remain moderate over the medium term, with net leverage (net adjusted debt/ operating EBITDAR) of around 4x by FY19 (FY16: 2.6x) due to its large capex plans and modest profitability.
Improvement in HMEL's Performance: HMEL's stronger performance in FY16 was driven by higher refinery throughput, better profitability and lower net debt. Throughput rose by nearly 47% to 10.3 million tonnes in FY16, resulting in stable revenues of about INR290bn (FY15:INR289bn) despite a fall in crude prices. The company also turned profitable compared with an EBITDA loss in FY15. Fitch expects HMEL's operations to continue to improve, given the refinery's high Nelson complexity of 12.6. We expect HMEL's financial profile to improve over the medium term due to lower debt as the company has capex plans of only USD300m (around INR20bn) over the next two to three years. HMEL's negative EBITDA and large debt in FY15, which were proportionally consolidated in its parent's financials, impacted HPCL's financial profile.
Fitch's key assumptions within our rating case for the issuer include:
- HPCL's standalone gross refining margin of around USD5 per bbl in FY17 and USD4.5 per bbl in FY18 and FY19
- No net under-recoveries for FY17 and FY18
- Oil prices of USD35 per bbl for FY17, USD45 for FY18 and USD55 for FY19 in line with Fitch's base case price deck as outlined in "Oil Price Assumption for Fitch Corporate Analysis Lowered Again to USD35 for 2016", dated 24 February 2016
- Total capex of around INR430bn over the next five years
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
-An upgrade of the sovereign's rating, provided the rating linkages with the state remain intact.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A downgrade of the sovereign rating
- Weakening of linkages between HPCL and the state, which could arise due to a reduced policy role
For the sovereign rating of India, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 7 December 2015.
The main factors that individually or collectively could lead to positive rating action are:
- Fiscal consolidation or fiscal reforms that would cause the general government debt burden to fall more rapidly than expected in the medium term
- An improved business environment resulting from implemented reforms and persistently contained inflation, which would support higher investment and real GDP growth
The main factors that individually or collectively could lead to negative rating action are:
- Deviation from the fiscal consolidation path, causing the already high public debt burden to deviate further from the median, or greater-than-expected deterioration in the banking sector's asset quality that would prompt large-scale financial support from the sovereign
- Loose macroeconomic policy settings that cause a return of persistently high inflation levels and a widening current account deficit, which would increase the risk of external funding stress
This news release contains forward-looking statements. Company has identified some of these forward-looking statements with words such as "anticipates," "believes," "expects," "estimates," "is likely," "predicts," "projects," "forecasts," "objectives," "may," "will," "should," "plans" and "intends" and the negative of these words or other comparable terminology. These forward-looking statements include statements relating to status of the separation process, the plan to pursue an IPO of up to 20 percent of the common stock of Company and the expected completion of the separation through the subsequent distribution of Company common stock, the anticipated timing of completion of the planned IPO and subsequent distribution of the remaining Company common stock, the plan to reorganize under a new public holding company to be called Company Global Holdings Inc. and Company's and Company's ability to pursue their long-term strategies. In addition, Company may from time to time make forward-looking statements in its annual report, quarterly reports and other filings with the SEC, news releases and other written and oral communications. These forward-looking statements are based on Company's expectations and assumptions, as of the date such statements are made, regarding Company's future operating performance and financial condition, including the proposed separation of its specialty chemicals and Company businesses, the proposed IPO of its Company business, the expected timetable for completing the IPO and the separation, the proposal to reorganize under a new holding company, the future financial and operating performance of each company, strategic and competitive advantages of each company, the leadership of each company, and future opportunities for each company, as well as the economy and other future events or circumstances.