Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the bank loan facilities and debt instruments of Chennai Petroleum Corporation Ltd (CPCL). CRISIL Ratings has withdrawn its ratings on non convertible debentures (NCD) of Rs.1,545 crore on request from the company and on receipt of requisite documentation, in line with CRISIL Ratings policy on withdrawal of rating on debt instruments.

 

The ratings continue to derive comfort from the strong operational, managerial, and financial support CPCL receives from its parent Indian Oil Corporation Limited (IOCL, rated ‘CRISIL AAA/Stable/CRISIL A1+’), wherein the company continues to be strategically important to its parent.

 

Operating performance has remained healthy in fiscal 2024 benefitting from a record throughput and healthy Gross Refining Margins (GRMs). Company achieved its highest throughput of 11.64 MMT at 111% utilisation while overall GRMs moderated on-year but remained healthy at $8.64/bbl in fiscal 2024 as compared to $11.91/bbl in the previous year. Operating performance in the first six months of fiscal 2025 moderated on-year owing to moderated physical performance impacted by a planned maintenance activity of some of their primary and secondary units in the second quarter with company achieving 94% utilisation and consequent unfavourable product mix which along with fall in crack spreads led to decline in GRM to $2.93/bbl. A recovery in GRMs is expected in the second half this fiscal as the plant resumes its optimum utilisation levels. Over the medium term, company’s GRMs are expected to be healthy, albeit moderated from the FY2023 levels and in-line with moderation in the product crack spread in the international markets.

 

Healthy operating performance led the marked improvement in overall financial risk profile, with total debt reducing to Rs 2,762 crore as of March 31, 2024 from Rs 4,235 crore as on March 31, 2023. Gearing stood at 0.32 times as on March 31, 2024, improving from 0.68 times as on March 31, 2023. However, modest profitability in the first half of this fiscal and the impact of the maintenance activities has led to increased working capital debt with total debt increasing to Rs 6,087 crore as of September 31, 2024. Over the medium term, healthy operating performance and cash accruals should be sufficient to fund the capex needs as well as planned investments in the joint venture with successive moderation in debt levels keeping financial risk profile healthy.

Analytical Approach

CRISIL Ratings has centrally factored in the strong business and financial linkages with its parent, IOCL. IOCL had infused Rs 1,000 crore in fiscal 2016 through subscription of non-convertible, cumulative and redeemable preference shares to support the capital requirement of CPCL; these shares have been treated as debt. CPCL redeemed Rs 500 crore of these shares in June 2018.

Key Rating Drivers & Detailed Description

Strengths:

• Strong operational, managerial, and financial support from the parent: CPCL is of strategic importance to IOCL as the latter has, and will continue to hold a majority stake (51.89% as on September 31, 2024) in the former. The parent has strong representation on CPCL’s board, including a common chairman. The company derives operational synergies as IOCL is also in the same business; the synergies include pooled sourcing of crude oil through IOCL, and benefits from the parent’s bulk purchase. Furthermore, IOCL buys over 90% of CPCL’s output; the company caters to the parent’s product requirement in South India. CPCL’s sales volumes are therefore not expected to be affected by the presence of any new refinery in the southern region. The company’s association with IOCL enhances financial flexibility as it is viewed at par with its parent; CPCL thus enjoys benefits related to pricing of debt facilities and favourable credit terms.

 

• Comfortable financial risk profile: Improved operating performance has significantly benefited the balance sheet position of the company. Adjusted gearing has improved to 0.32 times as on March 31, 2024 against 0.68 times as on March 31, 2023 while interest coverage has improved marginally to 20.1 times from 17.3 times. Aggregate debt had increased in fiscal 2022 to Rs 9,223 crore primarily to fund the working capital requirement, due to heightened volatility in the crude oil prices, however, strong operating performance and cash accruals has since been used to reduce borrowings to Rs. 2,762 crore as on March 31, 2024. Further, modest profitability in the first half of this fiscal and the impact of the maintenance activities has led to increased working capital debt with total debt increasing during the period to Rs 6,087 crore as of September 31, 2024. Over the medium term, healthy operating performance and cash accruals should be sufficient to fund the capex needs as well as planned investments in the joint venture with successive moderation in debt levels keeping financial risk profile healthy.

 

The planned refinery expansion of 9 million metric tonne per annum (mmtpa) to be set up at Cauvery basin, has undergone a revision in project cost, ownership and funding. The projected cost is now revised to Rs 36,354 (+/-10%) crore with CPCL and parent, IOCL now holding 25% and 75% stake each, respectively; however, CPCL’s total investment will remain limited to around Rs 3,000 crore, despite the revisions. CPCL has already invested the initial equity of Rs 1,055 crore by March 31, 2024 is expected to invest Rs 500-600 crore annually till the COD which is expected to be April-2029. Even on factoring the remaining investments in the JV, the financial risk profile should remain comfortable, with adjusted gearing at below 0.5-0.7 times.

 

Weaknesses:

• Vulnerable to volatility in crude oil prices and forex movements: Crude oil prices have been volatile over the past few years. Prices fell sharply to around $20 per bbl towards the end of March 2020, but subsequently recovered to pre-pandemic levels, averaging $64 per bbl. by the end of fiscal 2021. The geopolitical tensions once again, drove crude oil prices to above $ 100/bbl. during first quarter of fiscal 2023 which normalized to ~$ 75-85/bbl by end of March-2024 before falling to $70-75/bbl in recent months.  Average inventory of crude oil and finished goods of around 40 days makes CPCL's operating performance vulnerable to fluctuations in valuations of inventory stock. CPCL currently imports majority of its crude oil requirement from the Middle East. Also, given sale-purchase differential in currency, margins and operating performance to remain volatile to adverse movement in foreign currency mainly USD/INR pair.

 

• Moderate business risk profile: Being a standalone refinery, CPCL’s operating performance has a high earnings sensitivity to GRMs. CPCL’s overall GRMs was impacted in fiscal 2020 falling to $2.5/bbl but recovered strongly since then and has remained healthy at $7-12/bbl. over the past years with healthy crack spreads and support from inventory gains. The improvement in operating performance in fiscal 2023 was mainly driven by  the spike seen in core GRMs given the impact of the geopolitical event; which moderated in fiscal 2024 with moderation in the realized product crack spreads. Further, moderation in crack spreads during the second quarter of fiscal 2025 has led to moderation in GRM, which have begun to recover and are expected to be healthy over the medium term, albeit moderated from the FY2023 levels.

 

ESG Profile

 CRISIL Ratings believes that CPCL’s Environment, Social, and Governance (ESG) profile supports its strong credit risk profile.

The Oil and Gas sector has a moderate environmental and social impact, primarily driven by its raw material sourcing strategies, waste intensive process, and its direct impact on the health of the environment. CPCL has continuously focused on mitigating its environmental and social risks.

 

Key ESG highlights:

• CPCL is committed in its efforts to protect and restore the environment and has reduced the total energy consumption intensity in fiscal 2024 to 3.38 Gigajoule per metric tonne of crude throughput by increasing the energy consumed from renewable sources and reduced its Total Scope 1 and Scope 2 emission intensity in terms of crude throughput in fiscal 2024 to 0.243 tons of CO2 equivalent per Metric tons from 0.258, last year.
• Its endeavour to focus on environmental factors includes many firsts in the industry in India including Asia's first sewage reclamation plant, first public sector refinery to install windmill farm to power refinery operations and also to sell and transact through Indian Energy Exchange (IEX), first to produce rocket propellant fuel & missile fuel, convert semi-regenerative to continuous catalytic reformer etc.
• In water management, the company was the first to adopt sea water desalination technology for refinery operations and does not consume freshwater for the production process.
• The company has a good track record in social factors with 'nil' Lost Time Injury Frequency Rate (LTIFR) and sexual harassment cases. Gender diversity too has improved on-year with ~5.27% of total workforce in fiscal 2024 comprising of women employees with aggregate employee attrition of 1.3%.
• Its governance structure is characterized by ~21% of its board comprising independent directors, healthy investor grievance redressal and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. CPCL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to both domestic and foreign capital markets.

Liquidity: Superior

Financial flexibility remains healthy, backed by the strong funding support received from IOCL. While CPCL’s accruals were impacted in the first half of the current fiscal, it is expected to recover in the second half with improved operating performance. Thereafter, annual cash accruals should remain at Rs 1,000-1,500 crore and sufficient for capex and JV investments funding with limited increase in working capital debt. CPCL has redeemed the Rs 775 crore NCDs due June-2024 through internal accruals, with next major repayment of Rs 810 crore NCDs due in July-2025. Furthermore, on an average there has been a minimal need for utilisation of the fund-based limits, over the past one year.

Outlook: Stable

The ‘Stable’ outlook reflects CRISIL Rating’s outlook on CPCL’s parent. The company’s status as a subsidiary of IOCL enhances its competitive position in the domestic market. IOCL extends financial and management support to CPCL and provides assured offtake for around 90% of the latter’s finished products

Rating sensitivity factors

Downward Factors:

• Downgrade in the credit ratings of IOCL by at least 1 notch or reduction in its shareholding or support philosophy towards CPCL
• Higher-than-expected and sustained deterioration in CPCL’s standalone performance

About the Company

CPCL was incorporated as Madras Refineries Ltd in 1965, a JV between the Government of India, National Iranian Oil Co (NIOC) and American Oil Co (a wholly owned subsidiary of USA-based Standard Oil Co). In March 2001, IOCL acquired the government’s equity stake for Rs 510 crore, and NIOC transferred its stake to its affiliate, Naftiran Intertrade Co Ltd (NICO), in July 2003. Currently, IOCL holds 51.89% stake in CPCL while NICO holds 15.40%; the remainder is held by financial institutions, corporate bodies, the general public and others.

 

Currently, CPCL has a refining capacity of 10.5 mmtpa at Manali. The company produces petroleum products, lubricants, and additives. CPCL also provides high-quality feedstock such as propylene, superior kerosene, butylenes, naphtha, paraffin wax, and sulphur to other industries.

 

CPCL, through a JV, is setting up a 9-mmtpa refinery at Cauvery Basin, Nagapattinam which has been approved by both CPCL and IOCL’s board including a recent revision in plans. The projected cost is now revised to Rs 36,354 (+/-10%) crore with CPCL and parent, IOCL now holding 25% and 75% stake each, respectively; however, CPCL’s total investment will remain limited to around Rs 3,000 crore, despite the revisions. CPCL has already invested the initial equity of Rs 1,055 crore by March 31, 2024.

 

CPCL has a high nelson complexity index (NCI) of 10.03 (refineries with high NCI have the necessary flexibility to process a variety of crude oils and can record high value addition).

 

For the six months ended September 31, 2024, CPCL reported loss after tax (PAT) of Rs (287) crore on revenues of Rs 34,786 crore as against PAT of Rs 1,738 crore on revenues of Rs 37,995 crore for the corresponding period of the previous fiscal.

Any other information: Not Applicable