| ONGC Petro additions Limited | ||||||
| Ratings placed on 'Watch Developing' | ||||||
| Rating Action | ||||||
| ||||||
| ||||||
| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has placed its ratings on the bank facilities and debt instruments of ONGC Petro additions Limited (OPaL) on ‘Rating Watch with Developing Implications’.
The rating watch follows the announcement by Oil and Natural Gas Corporation (ONGC) that its board has approved on the proposal on “Sustainable Capital Restructuring of ONGC Petro additions Limited (OPaL). The infusion of the capital as proposed will result in OPaL becoming a direct subsidiary of ONGC along with resultant improvement in debt protection metrics.
The proposal is however subject to approval from shareholders and Government of India. .
Under the proposed capital restructuring plan, ONGC will: a) Convert share warrants issued by OPaL and subscribed by ONGC into equity shares b) Buy-back the Compulsory Convertible Debentures (CCDs) of Rs 7,778 crore of OPaL for which ONGC has provided backstopping support c) Invest Rs 7,000 crore in equity/ quasi-equity security of OPaL
Post the implementation of the above restructuring plan by ONGC, OPaL will be a 95% held by ONGC and become a subsidiary of ONGC. The infusion of the capital as proposed shall also result in improvement in OPaL’s standalone credit profile on account of expected improvement in adjusted net worth and significant reduction in debt. The overall debt protection metrics shall also improve with expected reduction in interest expenses for OPaL from debt reduction and conversion of CCDs to equity.
The said transaction is expected to be completed in around 6 months and CRISIL Ratings will continue to monitor the same.
CRISIL ratings will resolve the watch following the completion of implementation of the above restructuring plan as well as a detailed discussion with the management with regards to continued support stance from ONGC and future plans for the company.
In FY2023, OPaL reported topline of Rs 14,598 crore (down 9.05% YoY) and EBITDA of Rs 474 crore (margin of 3.25% as against 15.87% previous year) due to increase in feedstock prices (Naphtha and natural gas). Debt excluding CCDs increased from Rs 23,722 crore in FY2022 to Rs 26,926 crore on account of lower-than-expected accruals. In Q1FY24, OPaL reported topline of Rs 3,865 crore (up 79% YoY) and EBITDA losses of Rs 70 crore resulting from weak end product prices due to lower-than-expected global demand. While the decline in feedstock costs shall help in recovering profitability in rest of fiscal 24, its expected exit from SEZ has been steadily delayed, thereby prolonging the benefits that would accrue on an annual basis.
The ratings factor in the strong operational, managerial, and financial support received from the key promoter, Oil and Natural Gas Corporation Ltd (ONGC); and healthy market position as OPaL is one of the largest integrated petrochemical plants in India with an assured supply of key feedstocks.
These strengths are partially offset by vulnerability of operating performance to the prices of feedstock and finished products, and modest debt protection metrics. Given the decline in operational performance over last few quarters, OPaL will continue to depend on replacement of debt to meet debt obligation. |
Analytical Approach The ratings of OPaL factor in the support received from its parent, ONGC. CRISIL Ratings believes OPaL will, in case of exigencies, receive distress support from the parent for timely repayment of debt considering its strategic importance to, and operational, financial, and managerial support from, ONGC. As on March 31, 2023, ONGC had invested Rs 4,363 crore in OPaL as equity and share warrants and provided backstopping support for Rs 7,778 crore of compulsory convertible debentures (CCDs; CRISIL Ratings has considered it as part of the networth) issued by the company, which was around 92% of its total equity requirement. ONGC and OPaL also have a shared name and similar logos. |
Key Rating Drivers & Detailed Description Strengths: Strong operational, financial and managerial support from ONGC: OPaL is strategically important to ONGC as it is a downstream integration of the parent for utilization of naphtha, ethane (C2), propane (C3) and butane (C4). OPaL has signed raw material supply agreements with ONGC for the purchase of feedstock such as C2, C3, C4 and naphtha for 15 years. A dedicated pipeline for the supply of naphtha from the ONGC Hazira plant to the OPaL plant has been constructed to ensure uninterrupted raw material supply.
While ONGC holds 49.36% stake in OPaL, it has extended significantly higher support. As on March 31, 2023, the parent had invested Rs 4,363 crore in the company as equity and share warrants and provided backstopping support for Rs 7,778 crore of CCDs issued by OPaL. The parent in the past had extended a letter of comfort to OPaL to raise Rs 9,500 crore debt; thus, the company was able to replace its short-term loans at competitive rates. OPaL also benefits from the strong financial flexibility it derives from being a part of the ONGC group, which helps to raise both short and long-term loans at short notice and competitive rates.
ONGC has the highest representation with three members on the board of OPaL, apart from a common chairman. OPaL and ONGC share the same brand name. The company will remain strategically important to the parent, and the latter is expected to continue to provide strong operational, managerial, and financial support to OPaL.
One of the largest integrated petrochemical plants in India: The petrochemical complex of the company is a large-scale project that is strategically located in Dahej SEZ and is well-placed to meet growing demand for petrochemical products both in the domestic and overseas markets. As sales are mainly undertaken in the domestic market, the company is exiting the SEZ. The project has assured supply of feedstock (C2, C3, and C4) and produces premium products. Furthermore, the plant has a dual feed cracker unit, which allowed it to use up naphtha and natural gas in 70:30 ratio in the nine months of fiscal 2023, given the high natural gas prices that help generate better production rates and margin.
Weaknesses: Vulnerability to prices of feedstock and finished products: Operating profitability will remain vulnerable to volatility in spreads between the prices of feedstock (naphtha and C2+ components) and finished products. The product cracks further moderated in fiscal 2023 on a year-on-year basis due to steep increase in feedstock natural gas prices and weak polymer spreads. Margin is expected to improve over the medium term with feedstock prices expected to decrease from their fiscal 2023 peak.
Modest financial risk profile: Operating performance declined in fiscal 2023 on account of high feedstock prices, wherein the outstanding debt as on March 31, 2023, has increased to around Rs 26926 crore from Rs 23,722 crore as on March 31, 2022, on account of weak operating profits. Debt protection metrics have deteriorated with interest coverage ratio likely to have fallen to 0.20 times in fiscal 2023 from 1.38 times in fiscal 2022. In fiscal 2024, the debt protection metrics are likely to continue to be modest, wherein there will be a continued dependence on replacement of debt to meet its debt repayment obligations.
Furthermore, because of the capital-intensive nature of the project, gearing is expected to remain high in the near term. Short-term loans have been replaced by long-term loans at competitive rates in the past, backed by letter of comfort extended by ONGC. |
Liquidity: Strong OPaL enjoys strong financial flexibility as it is part of the ONGC group. Capital expenditure is likely to remain moderate over the medium term given the major turnaround capex is completed in fiscal 2023. Fund-based limit of Rs 1,535 crore were utilised 39% on average over the 12 months through March 2023. Debt obligation of Rs 2,171 crore in fiscal 2024 is expected to be refinanced through unsecured medium-term loans and CPs. The strong parentage it receives from ONGC helps it to raise both short-term and long-term loans at short notice and competitive rates. Furthermore, ONGC has articulated that OPaL will continue to receive its need-based support. |
Rating Sensitivity Factors Upward factors
Downward factors
|
About the Company OPaL was incorporated in 2006 as a joint venture promoted by ONGC (49.36%), GAIL (India) Ltd (49.21%) and co-promoted by Gujarat State Petroleum Corporation (1.43%). The company has set up a grass root mega petrochemical project in Dahej, Gujarat, in the petroleum, chemical and petrochemical investment region/SEZ. The complex's main dual feed cracker unit has the capacity to produce 1,100 kilo tonne per annum (KTPA) of ethylene and 400 KTPA of propylene. The associated units comprise pyrolysis gasoline hydrogenation unit, butadiene extraction unit and benzene extraction unit. |
Key Financial Indicators (CRISIL Ratings-adjusted numbers)
|
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Yet to be placed |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Criteria Details
|