Rating Rationale

Strengths:
* 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 sprits, high-speed diesel, superior kerosene oil (SKO), and liquefied petroleum gas (LPG). Continuous supply of these products remains contingent on smooth operations of OMCs like BPCL. Any diminution in BPCL's strategic importance, or in GoI's management control will constitute a key rating sensitivity factor.

GoI 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. CRISIL believes GoI will 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 GoI support is a rating sensitivity factor.

* Established retail network and branding initiatives, supporting revenue growth
BPCL accounts for nearly 15% of the country's refining capacity, and has around 21% share in the domestic petroleum market, as of August 2019. The market position is underpinned by the company's entrenched marketing and distribution infrastructure, with around 14,802 retail outlets. BPCL also has an active domestic LPG customer base of 6.8 crore, as of August 2019, and has undertaken aggressive branding and marketing exercises. These initiatives will help the company maintain its established position in the domestic petroleum market.

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

Weaknesses:
* Exposure to project implementation risks, given the large investment plans
BPCL has undertaken several projects, which include increasing the refining capacity at Kochi (from 9.5 mmtpa to 15.5 mmtpa, commissioned in fiscal 2018) and Bina, setting up a petrochemical unit, modernising and augmenting the pipeline and city gas distribution infrastructure, and investing in exploration and production. Experience in implementing and operating large projects will hold the company in good stead. Nevertheless, project cost and timelines, and stabilisation of operations after completion, will be key monitorables.

* Limited pricing flexibility for SKO and LPG
BPCL faces under-recoveries owing to controlled prices of domestic SKO and LPG. While the GoI has provided budgetary support, absence of an institutionalised mechanism to meet under-recoveries, has led to delay in subsidy receipts. This risk is partially offset by deregulation of petrol and diesel (a major contributer to under-recoveries), implementation of the Direct Benefit Transfer scheme (DBT; or Pratyaksha Hastaantarit Laabh- PAHAL) for LPG, ongoing implementation of DBT for SKO, and clarity given by GoI on subsidy sharing. CRISIL believes these initiatives will help streamline the mechanism for meeting under-recoveries. However, timely receipt of subsidy and a well-defined institutionalised mechanism will be necessary for ensuring financial health of the sector on a long-term sustainable basis.

Liquidity: Superior
BPCL enjoys superior financial flexibility, driven by support from the GoI. 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. Annual capex of Rs 8,000-10,000 crore, is likely to be met via internal accrual and external borrowing. Long-term debt of Rs 1800-1900 crore in fiscal 2020, and Rs 3,220 crore in fiscal 2021, is expected to be funded via operational cash flows and fresh debt.