Rating Rationale

Strengths:
* Continued support from the 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.

Weaknesses:
* 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 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.