Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of Bharat Petroleum Corporation Ltd (BPCL). The rating on the non-convertible debentures totaling to Rs.1,440 crore has been withdrawn (see 'Annexure - Details of Rating Withdrawn') on receipt of redemption confirmation from debenture trustee. The rating withdrawal is in line with the policy of CRISIL Ratings.

  

The ratings continue to reflect BPCL’s established market position in the oil refining and marketing sector in India, its branding initiatives and strong operating efficiency. The ratings also factor in the company's strategic importance to the Government of India (GoI) and expectation of continued support from it. These strengths are partially offset by exposure to project implementation risk and inherent volatility in operating profitability owing to fluctuations in input prices.

 

Operating performance of BPCL improved sharply in the first nine months of fiscal 2024 with improvement in operating margin to ~9.3% on the back of lower crude oil procurement price and no corresponding change in the price of key petroleum products – high-speed diesel and motor spirit - resulting in healthy marketing margins. Operating margin remained low at 2.7% in fiscal 2023 due to a significant rise seen in crude oil prices, which could not be passed on to the customers; leading to the marketing margin taking a hit. This is despite a sharp improvement in the gross refining margins (GRM) in fiscal 2023 to $20.2 per barrel (bbl) with improvement in product spreads, uptake in demand and rising crude oil prices. GRM continued to remain healthy at $14.7 per bbl in the first nine months of fiscal 2024.

 

Financial risk profile improved in first nine months of fiscal 2024 with healthy accretion to net worth and lower debt levels given healthy operating cashflows; adjusted gearing (excluding lease liabilities) stood at 0.8 time as on September 30, 2023 and is likely to remain less than 1 time going forward.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of BPCL and its subsidiaries and joint ventures (JVs) - the subsidiaries have been fully consolidated and the JVs have been proportionately consolidated. CRISIL Ratings believes these entities are strategically important for, and have considerable operational linkages with, BPCL. The ratings also factor in governmental support.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Strategic importance to, and continued support from, GoI

The oil refining and marketing activity is strategic for India's economic development. Oil marketing companies (OMCs) dominate the domestic market for key petroleum products such as motor spirits, high-speed diesel, jet fuel and liquefied petroleum gas (LPG). Uninterrupted supply of these products is contingent on the smooth operations of OMCs, such as BPCL. Government has showcased its support towards this industry wherein during fiscal 2023, a one-time subsidy grant of Rs. 5,582 crore was provided for compensating BPCL for the under recoveries incurred on domestic LPG sales. The company should, therefore, remain strategically important to GoI and continue to play a key role in implementing the government's socio-economic policies. GoI also holds 52.98% stake in BPCL and exerts management control. Any diminution in the company's strategic importance or in GoI’s shareholding will remain key monitorables.

 

Established market position in the oil refining and marketing sector and branding initiatives support revenue growth

BPCL accounts for nearly 14% of the country's refining capacity and holds 22-23% share in the domestic petroleum products market. The company commands a higher retail market share in key products such as motor spirit and high-speed diesel. The market position is underpinned by the company's entrenched marketing and distribution infrastructure with 21,532 retail outlets as of December 2023. BPCL also has an active domestic LPG distributor base of 6,246 crore as of December 2023 and has undertaken aggressive branding and marketing exercises.

 

Strong operating efficiency

High-capacity utilisation of refineries ensures strong operating efficiency. Furthermore, proximity of refineries to the coast ensures logistical benefit and helps control the cost of transportation in procuring crude. The modernization and expansion of capacities undertaken at its refineries at Kochi, Kerala, and Bina, Madhya Pradesh over past few years should support the GRMs.

 

Weaknesses:

Moderate financial risk profile 

With sharp decline in debt (excluding lease liabilities) to Rs 47,520 crore as on September 30, 2023 (against Rs 60,455 crore as on March 31, 2023) due to lower working capital borrowings and repayment/prepayment of certain long-term debt given improved operating performance, gearing improved to 0.8 time from 1.4 times as on March 31, 2023. Gearing is expected to remain at less than 1 time going forward as well. The company has a budgeted capital expenditure (capex) outlay of Rs. 1,50,000 crore, over the next five fiscals, which will mainly be towards capacity expansion of refinery cum petrochemical plant, expansion of the city gas distribution network, etc. Part of the capex is discretionary in nature. Degree of reliance on debt to meet the capex will remain a key monitorable.

 

Susceptibility to volatility in crude oil prices

Crude oil prices have been volatile over the past few years. Prices of crude oil for Indian basket fell sharply to a low of around $20 per bbl in April 2020 before rising sharply to over $110 per bbl in March 2022; average procurement price stood at around $93 per bbl in fiscal 2023 and around $82 per bbl in year-to-date fiscal 2024. Average inventory of crude oil and finished goods of around 40-50 days make the operating performance of BPCL vulnerable to fluctuations in valuations of inventory stock. BPCL imports ~80% of its crude oil requirement and, thus, remains susceptible to volatility in the rupee-dollar exchange rate and a corresponding increase in the value of imports. BPCL compensates these volatilities through the marketing margin, and the company’s ability to continue to do so will remain a key monitorable.

Liquidity: Superior

BPCL, a Maharatna company, enjoys strong financial flexibility, driven by support from GoI and access to low-cost funds from domestic and overseas markets. As of September 2023, the company’s cash and equivalents (including oil bonds) increased to around Rs 23,000 crore against Rs 6,860 crore as of March 2023 and total sanctioned working capital fund-based limits of ~Rs 36,000 crore. Healthy cash accruals and available liquidity should be sufficient to meet scheduled debt repayment obligations of Rs 11,000-12,000 crore each in fiscals 2025-2026. Debt obligations for fiscal 2024 have majorly been met by the company. 

 

Environment, social, and governance (ESG) profile

CRISIL Ratings believes that the company’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile, which even benefits from the support received from the GoI.

 

The oil and gas sector has a significant impact on the environment due to the high carbon emissions released from the refineries and petrochemical plants. In line with this, BPCL has been continuously focusing on mitigating its environmental and social risks to ensure minimal impact.

 

Key ESG highlights:

• BPCL has undertaken efforts towards reducing its greenhouse gas (GHG) emissions. Total GHG emissions have come down to 0.22 tCO2/MT of throughput in fiscal 2023, a 12% reduction from previous year.
• To increase consumption of renewable energy, during fiscal 2023, BPCL has increased the capacity of renewable energy production to 45.5 megawatt (MW), while all plants have completed energy efficient lighting. Share of renewable energy in total consumption increased to 4.5%. Around 22% of retail outlets have been solarised till March 31, 2023, as compared to 12.7% a year earlier.
• BPCL disposes its hazardous waste in a responsible manner, as per guidelines of Central Pollution Control Board.
• The company has a good track record of customer grievance redressal and resolution of sexual harassment cases. Gender diversity, however, remained marginally lower than industry peers with women employees forming ~7% of the total workforce in fiscal 2023.
• BPCL’s governance structure is characterised by 46% of the board comprising independent directors (none of them having tenure exceeding 10 years), dedicated investor grievance redressal mechanism and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. BPCL’s continued commitment to ESG principles will play a key role in enhancing stakeholder confidence and ensure ease of raising capital from markets where ESG compliance is a key factor.

Outlook: Stable

CRISIL Ratings believes BPCL will continue to benefit from the management control and majority ownership of the GoI.

Rating Sensitivity Factors

Downward Factors

• Higher-than-expected and sustained deterioration in BPCL’s standalone performance
• Change in GoI’s support philosophy or reduction in stake below 51%

About the Company

BPCL, a government undertaking (52.98% ownership as on December 31, 2023), is an integrated refining and marketing company. It is India's second-largest oil marketing and third-largest refining company, with consolidated refining capacity of 35.3 MTPA, representing 14% of India's total installed capacity. The company operates two refineries along the west coast: a 12-MTPA refinery in Mumbai and a 15.5-MTPA refinery in Kochi. Additionally, Bharat Oman Refineries Ltd (BORL) which operated a 7.8-MTPA refinery in Bina has now been merged with BPCL. Retail operations are supported by a nationwide marketing network comprising 21,532 retail outlets and 2,600 km product pipeline.

 

For the nine month ended December 31, 2023, BPCL reported net profit of Rs 22,069 crore on revenues of Rs 331,529 crore as against net loss of Rs 4,739 crore on revenue of Rs 355,072 crore for the corresponding period of the previous fiscal.

Key Financial Indicators (Consolidated)*

Particulars	Unit	2023	2022
Revenue	Rs crore	473,749	347,449
Profit After Tax (PAT)	Rs crore	2,045	11,586
PAT Margin	%	0.4	3.3
Adjusted debt**/adjusted networth	Times	1.4	1.3
Adjusted interest coverage	Times	3.3	7.5

*Above numbers reflect analytical adjustments made by CRISIL Ratings

**excludes lease liabilities of Rs 8,921 crore as of March 2023 and Rs 8,601 as of March 2022

Any other information: Not Applicable