Detailed Rationale CRISIL Ratings on the bank facilities and debt programs of Hindustan Petroleum Corporation Limited (HPCL) continues to reflect HPCL’s established network as the third largest fuel retailer in the country as well as its branding initiatives. In fiscal 2023, revenues grew by ~25% on a y-o-y basis, to Rs. 440709 crores, led by pickup in demand and a low base effect. Improvement in product spreads, an uptake in demand and rising crude oil prices, led to a rise in overall gross refining margin (GRM) for the company, which improved to $12.10/bbl (barrel) in fiscal 2023 from $ 7.19/bbl in fiscal 2022. However, operating performance was severely impacted during fiscal 2023 despite significant improvement in GRM because of significant rise in crude oil prices as well as product prices, which could not be passed on to customers, leading to the losses in marketing segment.
HPCL remains strategically important to the Government of India (GoI), given the role it plays in India’s economic development. The ratings, therefore, continue to reflect HPCL’s strategic importance and expectation of continued support from GoI and parent Oil and Natural Gas Corporation (ONGC).
These strengths are however partially offset by exposure to project implementation risks and inherent volatility in the operating profitability, owing to fluctuations in input prices. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of HPCL and its subsidiaries and joint ventures (JVs). The subsidiaries have been fully consolidated, while the JVs have been proportionately consolidated. The subsidiaries and JVs are strategically important to HPCL as they reduce dependence on other refiners to source products for retail operations. Furthermore, the ratings factor in support received from the government, with managerial control and majority ownership through ONGC, a public sector undertaking of GoI.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
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). Uninterrupted supply of these products is contingent on smooth operations of OMCs, such as HPCL. The company would, therefore, remain strategically important to GOI, and continue to play a key role in implementing the government’s socio-economic policies. GOI has approved a one time grant of Rs 5617 crore for compensating the under-recoveries suffered by the corporation on sale of domestic LPG. This receivable has been recorded under revenue from operations.
HPCL has a refining capacity share of 10.8%, and owns 21% of India’s petroleum product pipelines. The coastal location of the refineries provides logistical advantages for the import of crude oil and export of petroleum products. Both refineries, Mumbai and Vishakhapatnam, have maintained healthy energy consumption levels. Market position is underpinned by an entrenched marketing and distribution infrastructure, with 20,361 retail outlets. The company had a network of 6,253 LPG distributors as on March 2023. Furthermore, aggressive branding and marketing exercises have been undertaken to expand the retail network. These initiatives should help maintain the strong brand position in the Indian petroleum market.
Weakness:
The company is undertaking several projects, including modernization and capacity expansion at the Mumbai and Visakhapatnam refineries, setting up a greenfield refinery in Barmer, Rajasthan, modernization .and augmentation of the pipeline infrastructure, and expansion in the natural gas sector. HPCL's experience in implementing and operating large projects should hold the company in good stead. Nevertheless, project cost and timelines, and stabilization of operations after completion will continue to be key monitorable. Consolidated gearing weakened for the company to around 2.31 times as on March 21, 2023 from 1.21 times as on March 31, 2022 as the company was unable to pass on increase in crude oil prices to its customers and high input prices also stretched its working capital requirements. While debt metrics of the company has weakened the company continues to derive benefits from financial flexibility being GOI undertaking and in the capital market resulting in its ability to raise funds at a short notice and at fine rates. Going forward, degree of reliance on debt to meet capital expenditure (capex) needs for the company will remain a key monitorable.
Crude oil prices have been volatile over the past few years. Margins were adversely impacted during Q1 & Q2 of FY23 as upsurge in crude oil prices could not be passed on retail customers, taking a hit on marketing margins. However, impact was moderated with moderation in crude oil prices during in Q3 & Q4. Overall GRM’s (including inventory gains) has significantly improved to 12.10 $/bbl in FY23 against the GRM of 7.19 $/bbl during previous fiscal. Going-forward, with crude oil price expected to be around $82-87 per bbl, the companies are expected to remain profitable on per unit profitability basis. Core GRMs is expected to be around $ 6 -9 per bbl.
The ongoing geo-political tensions have again elevated the crude oil prices. HPCL imports around ~78% crude oil requirement, and thus remains susceptible to volatility in the rupee-dollar exchange rate, and a corresponding increase in value of imports’ compensates these volatilities through marketing margins and their ability to do so will remain a key monitorable. |
Liquidity: Superior HPCL, a Maharatna company, has strong financial flexibility, driven by support from the GoI. The company's portfolio of oil bonds, large unutilized bank limit, and access to low-cost funds from both domestic and overseas markets can help raise resources when needed. Capital expenditure of ~Rs 9,000 crore in fiscal 2024 is likely to be met through internal accruals and external borrowings.
Environment, social, and governance (ESG) profile CRISIL Ratings believes the Environment, Social and Governance (ESG) profile of HPCL supports its already strong credit risk profile, which benefits from support from GoI. The oil and gas sector has a significant impact on the environment due to the high carbon emissions of refineries and petrochemical plants. HPCL has focused continuously on minimizing its environmental and social impact.
Key ESG highlights:
There is growing importance of ESG amongst investors and lenders. The commitment of HPCL to ESG principles will play a key role in enhancing stakeholder confidence, given the moderate share of market borrowing in debt and access to both domestic and foreign capital markets. |
Outlook Stable CRISIL Ratings believes HPCL will continue to benefit from its established market position in the oil refining and marketing sector, and support from the GoI owing to its strategic and economic importance. |
Rating Sensitivity factors Downward factors
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About the Company HPCL was established in 1974 following the nationalization and amalgamation of Esso Eastern Inc and Lubes India Ltd with the takeover of Caltex Oil Refining (India) Ltd. In January 2018, ONGC acquired 51.11% stake in HPCL from GoI.
HPCL is an integrated refining and marketing company. It has substantial oil marketing operations, and is the third-largest oil refining and marketing company in India. It operates a refinery in Mumbai, which has installed capacity of 9.5 MTPA, and refinery in Visakhapatnam with installed capacity of 8.3 MTPA; these refineries account for 6.3% of the country’s total installed capacity. The company has undertaken capacity expansion by 6.7 MTPA at its Visakh refinery taking its total capacity to 24.5 MTPA.
The company also has an 11.3 MTPA refinery in Bathinda, Punjab, through a JV with Singapore-based Mittal Energy Investments Pvt Ltd. HPCL is setting up a grass-root greenfield refinery-cum-petrochemical complex, with capacity of 9 MTPA in Barmer through HPCL Rajasthan Refinery Ltd ('CRISIL AA/Stable'), a JV with the Government of Rajasthan. HPCL has a wide distribution and marketing infrastructure network, including a network of cross-country pipelines, terminals, depots and 18,634 retail outlets. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
^^Yet to be issued ** USD 300 million external commercial borrowings converted at USD 1 = Rs 77/- # Current outstanding as on 28th April, 2022 is Rs. 1625 crore ^ Current outstanding as on 28th April, 2022 is Rs. 375 crore |
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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