Fitch Ratings has published India’s Bharat Petroleum Corporation Limited’s (BPCL) ‘BBB-‘Foreign Currency Long-Term Issuer Default Rating with Negative Outlook. The agency has also assigned BPCL a senior unsecured rating of ‘BBB-‘ and an expected rating of ‘BBB-(EXP)’ to its senior unsecured USD notes.
The final rating on the notes is contingent on the receipt of final documents conforming to information already received. BPCL’s rating is equalised with that of its 54.9% owner,the state of India (‘BBB- ‘/Negative),to reflect their strong operational and strategic ties.
The negative outlook on BPCL’s IDR reflects that of India. Fitch views BPCL as one of government of India’s (GoI) socio-economic policy tools through its provision of essential fuels at affordable prices. GoI’s policy has been to set prices for certain refined oil products – diesel,liquefied petroleum gas (for domestic use) and kerosene (sold through the public distribution system) – at levels that are lower than market prices,which lead to under-recoveries for BPCL. However,GoI has ensured that downstream public sector companies’ (PSCs including BPCL) annual net under-recoveries are kept under control through direct budgetary support and by directing upstream PSCs to supply feedstock at a discount.
The rating also reflects BPCL’s position as one of the three public sector oil refining and marketing companies in India (the other two being Indian Oil Corporation (IOC,’BBB-‘/ Negative) and Hindustan Petroleum Corporation Limited),and the three PSCs’ dominant position in the national oil industry.
Despite the differences in the scale of the three Indian PSC downstream companies – IOC accounts for 46% of India’s petroleum marketing against BPCL’s 22% – the GoI has exhibited a similar level of support to all three entities. GoI does not prioritise or discriminate between the three entities in terms of the support extended. The state of India holds majority stake in all these entities and exercises significant management and policy control. BPCL has low operating profitability due to the net under recoveries and the cost of funding liquidity gaps arising from late receipt of state subsidies.
BPCL’s significant capex to increase refinery capacity and operational efficiency has resulted in negative free cash flows in the last five years to FY12 with the exception of FY11. Given its further capex plans and continued net under recoveries,FCF is likely to be negative in the medium term. However,Fitch assesses that BPCL can maintain adequate liquidity due to cash and cash equivalents on hand of Rs 78.3bn at FYE12 and its good access to banks given its position as an important PSC.
WHAT COULD TRIGGER A RATING ACTION?
Negative: Future developments that may,individually or collectively,lead to negative rating action include: – a perceived weakening of BPCL’s linkages with the state of India – change in India’s ratings
Positive: Any positive rating action on India will result in a similar change to BPCL’s ratings,provided the rating linkages remain intact.
BPCL operates two refineries in Mumbai and Kochi with a capacity of 12mmtpa and 9.5mmtpa,respectively. BPCL holds a 61.65% stake in Numaligarh Refinery Ltd (3mmtpa) and a 50% stake in recently commissioned Bharat Oman Refinery Ltd (6mmtpa). BPCL has also acquired minority stakes in 28 Exploration &Production blocks (including 17 overseas). For FY12,consolidated revenue was Rs 2,119bn and operating profit was Rs 48.1bn.
Moody’s assigns Baa3 rating to Bharat Petroleum
Moody’s Investors Service today for the first time assigned a short-term debt rating — Baa3 — with a stable outlook to Indian petroleum major BPCL.
Moody’s has also assigned a provisional (P) Baa3 Prime-3 senior unsecured foreign currency debt rating,which is given to firms which have acceptable ability to repay short-term debt,to the proposed US dollar notes to be issued by BPCL (Bharat Petroleum Corporation Ltd).
The provisional bond rating was based on a review of documentation as of October 10,Moody’s said.
Moody’s would assign a definitive rating to the bond upon the closing of the proposed bond issuance and a review of the final terms.
“The Baa3 rating reflects BPCL’s strategic importance to the Indian government because of its position as the country’s third-largest refiner of crude oil and the second-largest distributor of petroleum products.
“It also takes into account the company’s relatively successful investments in upstream oil and gas assets,which provide longer term earnings potential,” Vikas Halan,Moody’s Vice President and Senior Analyst,said.
“These strengths are partially offset by BPCL’s high financial leverage,resulting from excessive fuel subsidies and relatively low-complexity refineries that generate lower margins,” he added.
BPCL’s Baa3 rating combines its standalone credit profile,or baseline credit assessment (BCA),of ba2 and a two-notch uplift under the joint-default analysis (JDA) methodology for government-related issuers,given that the Indian government has a 54.9 per cent stake in BPCL.
BPCL’s profitability and cash flow were affected by India’s ad-hoc oil subsidy-sharing scheme,under which it sells diesel and cooking fuel at below-market rates to help the government manage inflation.
However,Moody’s said the Indian government has a track record of adequately compensating BPCL for under-recoveries and ensuring that it achieves a reasonable level of profitability.
“The government has a high degree of influence over the company’s strategy decisions because of its ability to appoint all of the directors on BPCL’s board. We expect the government to provide strong support in times of distress,” Halan said.
On the other hand,although the government’s recent measures — such as hiking diesel prices and limiting the sales volume of cooking fuels at subsidised rates would help reduce the burden of oil subsidies,BPCL’s profitability and cash flow remain exposed to the uncertain regulatory environment,it added.