Rating Rationale
January 09, 2020 | Mumbai
Chennai Petroleum Corporation Limited
 
Rating Action
Total Bank Loan Facilities Rated Rs.5302.9 Crore
Long Term Rating CRISIL AAA/Stable
Short Term Rating CRISIL A1+
 
Rs.1500 Crore Non Convertible Debentures CRISIL AAA/Stable
Rs.6000 Crore Commercial Paper CRISIL A1+
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL's ratings on the bank facilities and debt instruments of Chennai Petroleum Corporation Limited (CPCL) continue to reflect the strong operational, managerial, and financial support CPCL derives from its parent, Indian Oil Corporation Ltd (IOCL; rated 'CRISIL AAA/Stable/CRISIL A1+'), and its moderate financial risk profile supported by healthy net worth, moderate gearing and interest coverage ratios. These strengths are partially offset by weakening operating performance and exposure to risks related to volatility in crude oil prices. 

Analytical Approach

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

Key Rating Drivers & Detailed Description
Strengths
* Strong operational, managerial, and financial support from 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 30, 2019), in the former. 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 parent's bulk purchase. Furthermore, IOCL buys over 80% of CPCL's output; the company caters to parent's product requirements in southern India. CPCL's sales volumes are, therefore, not likely 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.
 
* Moderate financial risk profile
Financial risk profile is supported by a healthy networth, and moderate gearing and interest coverage ratio. Net borrowings increased to Rs 6,668 crore as on March 31, 2019 (from Rs 4389 crore as on March 31, 2018), to fund the capex plans of the company (to undertake residual project upgrade and Bharat Stage'VI quality upgrade) as well as the company's working capital requirement. Working capital requirements of the company have increased on account of heightened volatility faced in the crude oil market. Liquidity is, however, largely supported by CPCL's status as a subsidiary of IOCL, and accordingly its financial flexibility is expected to continue to remain healthy.
 
Weaknesses
* Weakened operating performance
Operating performance declined during fiscal 2019 and the first-half of fiscal 2020 on account of heightened volatility in crude oil prices and lower product cracks realized. Product cracks for key products i.e. motor spirit and high speed diesel [constitute 70% of total product slate]) declined mainly on account of weakening in global GRMs. Capacity utilisation remained high at 93% during fiscal 2019, thereby maintaining peak utilisation level of fiscal 2015. The distillate yields of the refineries have also been steadily improving (74.4% as on March 31, 2019). CPCL has a high Nelson complexity index (NCI) of 9.5 (refineries with high NCI have the necessary flexibility to process a variety of crude oils and can record high value addition).
 
* Exposure to risks related to volatility in crude oil prices
Crude oil prices have fluctuated in the past few years: they increased to around $86 per barrel (bbl) in October 2018 and reduced to $57 per bbl during December 2018; later settling to $67 per bbl as on year end. Such volatility in crude oil prices resulted in substantial inventory losses, thus hampering operating performance. Recent increase in crude oil rates led to larger working capital requirement. CPCL currently imports most of its crude oil requirement from the Middle East countries. Large import dependence exposes CPCL to volatility in foreign exchange rates.
Liquidity Superior

Financial flexibility remains healthy, backed by the strong promoter support it receives from IOCL. On average, CPCL reports a healthy cash accrual of Rs 1,000 crore, although performance has weakened recently. Furthermore, fund-based limit of Rs 4,000 crore has seen minimal utilisation.

Outlook: Stable

The 'Stable' outlook reflects CRISIL's rating 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 80% of the latter's finished products.

Rating sensitivity factors
Downward Factor
* Decline in the credit ratings of IOCL by 1 notch
* Higher-than-expected and sustained deterioration in CPCL's standalone performance.

About the Company

CPCL was incorporated as Madras Refineries Ltd in 1965, a joint venture between the Government of India, National Iranian Oil Company (NIOC), and American Oil Company (a wholly owned subsidiary of the US-based Standard Oil Company). In March 2001, IOCL acquired government's equity stake for Rs 510 crore and NIOC transferred its stake to its affiliate, Naftiran Intertrade Company Ltd (NICL), in July 2003. Currently, IOCL holds a 51.89% in CPCL while NICL holds 15.40%; the remainder is held by financial institutions, corporate bodies, the general public, and others.
 
CPCL has a total refining capacity of 11.5 million tonne per annum (mtpa), with 10.5 mtpa and 1 mtpa at Manali and Nagapattinam, respectively (both in Tamil Nadu). 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.
 
For the six months ended September 30, 2019, CPCL incurred a loss of Rs 443 crore on revenue of Rs 19,409 crore, against a profit after tax (PAT) of Rs 183 crore on revenue of Rs 21,547 crore for the corresponding period of the previous fiscal.

Key Financial Indicators
As on/for the period ended Mar 31 2019 2018
Revenue Rs crore 41,389 32,526
Profit After Tax (PAT) Rs crore -205 927
PAT Margins % -0.5 2.9
Adjusted debt/adjusted networth Times 2.00 1.11
Interest coverage Times 1.38 6.64

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs Cr) Rating Assigned with Outlook
NA Cash credit NA NA NA 2500.0 CRISIL AAA/Stable
NA Letter of credit & bank guarantee NA NA NA 184.0 CRISIL A1+
NA Packing credit* NA NA NA 1500.0 CRISIL AAA/Stable
NA Proposed Short Term Bank Loan Facility NA NA NA 873.9 CRISIL A1+
NA Proposed Long Term Bank loan facility NA NA NA 245.0 CRISIL AAA/Stable
NA Non-Convertible Debentures$ NA NA NA 1500.0 CRISIL AAA/Stable
NA Commercial Paper NA NA 7-365 days 6000.0 CRISIL A1+
*One way interchangeability with CC
$Not yet placed
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  6000.00  CRISIL A1+      26-11-19  CRISIL A1+  16-11-18  CRISIL A1+  10-11-17  CRISIL A1+  -- 
                30-04-18  CRISIL A1+  28-09-17  CRISIL A1+   
Non Convertible Debentures  LT  0.00
09-01-20 
CRISIL AAA/Stable      26-11-19  CRISIL AAA/Stable  16-11-18  CRISIL AAA/Stable  10-11-17  CRISIL AAA/Stable  CRISIL AAA/Stable 
                30-04-18  CRISIL AAA/Stable  28-09-17  CRISIL AAA/Stable   
Fund-based Bank Facilities  LT/ST  5118.90  CRISIL AAA/Stable/ CRISIL A1+      26-11-19  CRISIL AAA/Stable/ CRISIL A1+  16-11-18  CRISIL AAA/Stable/ CRISIL A1+  10-11-17  CRISIL AAA/Stable/ CRISIL A1+  CRISIL AAA/Stable/ CRISIL A1+ 
                30-04-18  CRISIL AAA/Stable/ CRISIL A1+  28-09-17  CRISIL AAA/Stable/ CRISIL A1+   
Non Fund-based Bank Facilities  LT/ST  184.00  CRISIL A1+      26-11-19  CRISIL A1+  16-11-18  CRISIL A1+  10-11-17  CRISIL A1+  CRISIL A1+ 
                30-04-18  CRISIL A1+  28-09-17  CRISIL A1+   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 2500 CRISIL AAA/Stable Cash Credit 2500 CRISIL AAA/Stable
Letter of credit & Bank Guarantee 184 CRISIL A1+ Letter of credit & Bank Guarantee 184 CRISIL A1+
Packing Credit* 1500 CRISIL AAA/Stable Packing Credit* 1500 CRISIL AAA/Stable
Proposed Long Term Bank Loan Facility 245 CRISIL AAA/Stable Proposed Long Term Bank Loan Facility 245 CRISIL AAA/Stable
Proposed Short Term Bank Loan Facility 873.9 CRISIL A1+ Short Term Bank Facility 873.9 CRISIL A1+
Total 5302.9 -- Total 5302.9 --
*One-way interchangeability with cash credit
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Petrochemical Industry
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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