Detailed Rationale

CRISIL ratings on the long-term bank facilities and debt programmes of Bharat Petroleum Corporation Ltd (BPCL) continues on 'Rating Watch with Developing Implications'. The ratings on the short-term bank facilities and commercial paper have been reaffirmed at 'CRISIL A1+'. CRISIL Ratings has withdrawn its rating on the bank facilities of Rs 8343.5 crore following the request from BPCL. The withdrawal is in line with CRISIL Rating’s policy.

 

The rating was placed on watch on November 29, 2019, following the receipt of approval from the Cabinet Committee on Economic Affairs (CCEA) for divestment of the Government of India's entire shareholding in BPCL (and management control thereon) to a strategic buyer. Additionally, CCEA has approved the disinvestment of BPCL's shareholding of 61.65% in Numaligarh Refinery Ltd (NRL; 'CRISIL AAA/Stable/CRISIL A1+'), along with the transfer of management control, to a central public sector enterprise operating in the oil and gas sector.

 

The rating action also reflects the potential weakening of the strategic links between the central government and BPCL following the CCEA approval, and the government's disinvestment stance.

 

CRISIL Ratings continues to monitor developments on the stake sale, change in the government's support philosophy, and the credit risk profile of the buyer if the divestment concludes. These will remain key rating sensitivity factors. CRISIL Ratings will reassess the linkages and take an appropriate rating action after clarity emerges on the identification of a buyer and transaction structure. Given the strength of BPCL's credit risk profile, the impact on the long-term rating, if any, is not expected to be more than two notches.

 

The entire transaction closure may take time to crystallise. Nevertheless, BPCL is expected to receive continued support from the government till the closure of the disinvestment.

 

While demand for petroleum products declined on account of the lockdown imposed on March 25, 2020, the second quarter of fiscal 2021 witnessed improvement in demand and healthy inventory gains, which enabled BPCL to clock a robust operating profit. However, this was partly offset by weak refining margin. For the first six months of fiscal 2021, average capacity utilisation averaged 80%. Given the weak product demand, gross refining margin (GRM) is expected to remain subdued in the near term.

 

The ratings factor in BPCL's established retail network and branding initiatives, and strong operating efficiency. These strengths are partially offset by exposure to project implementation risks and limited pricing flexibility given the controlled price environment for certain products.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of BPCL and its subsidiaries, including NRL and Bharat Oman Refineries Limited (BORL; 'CRISIL AA+/watch developing/CRISIL A1+'). This is because CRISIL Ratings believes NRL and BORL are strategically important to BPCL's business risk profile as they reduce the latter's dependence on other refiners and allow it to source products for retail operations in central India. Joint ventures (JVs) such as Bharat Renewable Energy Ltd and Bharat Stars Services Pvt Ltd have been proportionately consolidated, given their strategic importance to BPCL.

 

Furthermore, the ratings factor in support from the government. The rating approach may undergo a change based on the outcome of the divestment process.

 

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

Key Rating Drivers & Detailed Description

Strengths:

* Continued support from government

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, superior kerosene oil (SKO), and liquefied petroleum gas (LPG). Continuous supply of these products remains contingent on the smooth operations of OMCs such as BPCL. Any diminution in BPCL's strategic importance, or in the government's management control till the conclusion of its divestment will constitute a key rating sensitivity factor.

 

The government has supported OMCs through budgeted subsidies and discounts from upstream companies, thereby minimising their sales-related under-recovery burden. Post deregulation of diesel, under-recoveries have declined significantly, further aided by favourable crude prices and reduced consumption of subsidised LPG. The government is expected to continue to support BPCL by absorbing a large portion of its sales-related under recoveries, if any. That said, any change in adequacy and timeliness of government support are rating sensitivity factors.

 

With the government planning to divest its stake in BPCL, the credit risk profile and support articulation from the acquirer, once identified, would be key rating sensitivity factors.

 

* Established retail network and branding initiatives, support revenue growth

BPCL accounts for nearly 15% of the country's refining capacity and had around 26% share in the domestic petroleum market as of September 2020. Industry position is underpinned by the company's entrenched marketing and distribution infrastructure, with around 17,125 retail outlets. BPCL also has an active domestic LPG customer base of 8.36 crore (as of September 2020), and has undertaken aggressive branding and marketing exercises. These initiatives should help maintain its established position in the domestic petroleum segment.

 

* Strong operating efficiency

High capacity utilisation at refineries ensures strong operating efficiency. Furthermore, proximity of refineries to the coast gives logistical advantage and helps control transportation cost in procuring crude. The refinery at Numaligarh, Assam, with capacity of 3 million tonne per annum (mtpa), has high operational efficiency, as reflected in healthy GRM, even after excluding excise duty benefit, and has fared consistently better than other public sector refiners. GRM could improve further, supported by the recently completed modernisation and capacity expansion of the refineries at Kochi, Kerala, and Bina, Madhya Pradesh.

 

Weakness:

* Exposure to project implementation risk given the large investment plans

BPCL has undertaken several projects, which include increasing the refining capacity at Kochi (from 9.5 mtpa to 15.5 mtpa, commissioned in fiscal 2018) and at Bina (from 6.0 mtpa to 7.8 mtpa, commissioned in fiscal 2019), setting up a petrochemical unit, modernising and augmenting the pipeline and city gas distribution (CGD) infrastructure, and investing in exploration and production.

 

The capital expenditure (capex) spread over the next two fiscals will be mainly towards petrochemical plants; capacity expansion for BS VI motor spirit; setting up second-generation ethanol biorefinery in Odisha; cross-country petroleum, oil, and lubricants pipeline and marketing terminals at various locations, and expansion of the retail outlet network. Capex also includes investment in its subsidiaries: Bharat Petro Resources Ltd (BPRL) and Bharat Gas Resources Limited (BGRL) towards exploration and production activities and expansion of the CGD network.

 

* Limited pricing flexibility for SKO and LPG

BPCL faces under-recoveries because of controlled prices of domestic SKO and LPG. While the government has provided budgetary support, absence of an institutionalised mechanism to meet under-recoveries has delayed subsidy receipts. This risk is partially offset by deregulation of petrol and diesel (a major contributor to under-recoveries), implementation of the Direct Benefit Transfer scheme (DBT; or Pratyaksha Hastaantarit Laabh) for LPG, ongoing implementation of DBT scheme for SKO, and clarity given by the government on subsidy sharing. These initiatives are likely to help streamline the mechanism for meeting under-recoveries. However, timely receipt of subsidy and a well-defined institutionalised mechanism will be necessary for ensuring the financial health of the sector in the long-run.

Liquidity: Superior

Financial flexibility is high, driven by support from the government. The portfolio of oil bonds, large unutilised bank limit and access to low-cost funds from both domestic and overseas markets can also help raise resources when needed. Capex of around Rs 8,000 crore in fiscal 2021 is likely to be met by internal cash accrual and external borrowing. Repayment of long-term debt of around Rs 3,800 crore in fiscal 2021, and around Rs 6,300 crore in fiscal 2022, are expected to be funded through operational cash flow and fresh debt. Out of the fund-based limit of Rs 13,000-14,000 crore, currently utilisation is Rs 50 -60 crore (mainly to tide over temporary cash flow mismatch). In the ordinary course of business, the company does not anticipate raising more than Rs 8,000-9,000 crore by way of CPs and fund-based limits.

Rating Sensitivity factors

Downward factors

* Reduction in government’s stake below 51% and if credit profile of buyer is comparatively weaker

* Significant increase in sales-related under-recoveries on a sustained basis, leading to rise in the amount recoverable under the subsidy scheme

About the Company

BPCL, a government undertaking (52.98% ownership as on September 30, 2020), was set up as Bharat Refineries Ltd (BRL) in 1976 by merging Burmah Shell Oil Storage and Distribution Company of India Ltd with Burmah Shell Refineries Ltd. In 1977, BRL was renamed BPCL.

 

BPCL is an integrated refining and marketing company. It is India's second-largest oil marketing and the third-largest refining company, with a consolidated refining capacity of 38.3 mtpa, representing 15% of India's total installed capacity. The company operates two refineries, both along the west coast: a 12-mtpa refinery in Mumbai, and a 15.5-mtpa refinery in Kochi. It also owns a 61.65% stake in NRL, which has a refinery with capacity of 3 mtpa in Northeast India. BPCL, through its subsidiary, BORL, operates a 7.8-mtpa refinery in Bina. Retail operations are supported by a nationwide marketing network comprising around 17,125 retail outlets and 2,241 kilometre of product pipeline.

Key Financial Indicators - (Consolidated)*

Particulars	Unit	2020	2019
Revenue	Rs crore	284,971	296,985
Profit after tax (PAT)	Rs crore	3,666	8,528
PAT margin	%	1.3	2.9
Adjusted debt/adjusted networth	Times	1.70	1.10
Interest coverage	Times	4.56	11.42

*Above numbers reflect analytical adjustments made by CRISIL Ratings;

Any other information: Not applicable

Annexure - Details of Instrument(s)

SIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity levels	Rating assigned with outlook
INE029A07075	Debentures	10-Mar-17	7.35%	10-Mar-22	550.00	Simple	CRISIL AAA/Watch Developing
INE029A08040	Debentures	16-Jan-18	7.69%	16-Jan-23	750.00	Simple	CRISIL AAA/Watch Developing
INE029A08057	Debentures	11-Mar-19	8.02%	11-Mar-24	1,000.00	Simple	CRISIL AAA/Watch Developing
NA	Debentures#	NA	NA	NA	1,200.00	NA	CRISIL AAA/Watch Developing
INE029A08065	Debentures	6-July-20	6.11%	6-July-25	1955.2	Complex	CRISIL AAA/Watch Developing
NA	Debentures#	NA	NA	NA	1044.80	Complex	CRISIL AAA/Watch Developing
NA	Debentures#	NA	NA	NA	3,500	NA	CRISIL AAA/Watch Developing
NA	Commercial Paper	NA	NA	7-365 days	22000	Simple	CRISIL A1+
NA	Fund-Based Facilities &	NA	NA	NA	12541	NA	CRISIL AAA/Watch Developing
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	8343.50	NA	Withdrawn
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	14029.01	NA	CRISIL AAA/Watch Developing
NA	Non-Fund Based Limit	NA	NA	NA	20129.99	NA	CRISIL A1+
NA	Short term bank Facility%	NA	NA	NA	13300.00	NA	CRISIL A1+

 

& Rs 4600 crore Interchangeable with non-fund-based facilities

%Revolving line of credit sanctioned by Reserve Bank of India

#proposed