Rating Rationale
February 22, 2024 | Mumbai
SUN Petrochemicals Private Limited
Ratings reaffirmed at 'CRISIL AA/Stable/CRISIL A1+'
 
Rating Action
Rs.1000 Crore Non Convertible DebenturesCRISIL AA/Stable (Reaffirmed)
Rs.1000 Crore Non Convertible DebenturesCRISIL AA/Stable (Reaffirmed)
Rs.400 Crore Commercial PaperCRISIL A1+ (Reaffirmed)
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 reaffirmed its 'CRISIL AA/Stable/CRISIL A1+' ratings on the non-convertible debentures (NCDs) and commercial paper programme of SUN Petrochemicals Pvt Ltd (SPPL).

 

The ratings centrally factor in the strong operational setup and management of the company, and the strong support from its parent, Shanghvi Finance Pvt Ltd (SFPL). The ratings also factor in the adequate reserves and low cost of production at its main Bhaskar oilfield, offtake agreement with Indian Oil Corporation Ltd (IOCL; ‘CRISIL AAA/Stable/CRISIL A1+’) for the entire production and improved financial risk profile, with comfortable debt protection metrics. These strengths are partially offset by inherent geological risks in scaling up production at the existing as well as recently awarded oilfields under the discovered small fields (DSF) policy and open acreage licensing programme (OALP), increase in government’s share of profit after recovery of capital expenditure (capex) and susceptibility of operating performance to fluctuations in crude oil prices.

 

SPPL achieved healthy ramp-up in operations with average crude oil volume increasing to 5,400 barrel (bbl) per day in fiscal 2023 and further to about 6,000 bbl per day in the first nine months of fiscal 2024 (2,716 bbl per day in fiscal 2022). Higher volume and elevated crude oil prices resulted in revenue more than doubling to Rs 1,368 crore in fiscal 2023 and Rs 1,075 crore in the first nine months of fiscal 2024. Operating margin was healthy at 68% in fiscal 2023 and in the nine months of fiscal 2024, driven by higher crude oil prices. Even if crude oil prices settle below $70 per bbl over the medium term, the operating margin of SPPL should remain comfortable, given the low cost of production.

Analytical Approach

CRISIL Ratings has considered the standalone credit risk profile of SPPL and factored in support from its parent, SFPL.

Key Rating Drivers & Detailed Description

Strengths:

  • Adequate reserves and offtake agreement for the entire output: SPPL has ventured into the upstream oil and gas business and holds the development and production rights for four oilfields in Gujarat: Baola, Modhera, Hazira and Bhaskar. The Bhaskar oilfield is the main block, wherein production has ramped up beyond 6,000 bbl per day and is expected to peak at 7,500 bbl per day over the medium term. The company has an offtake agreement with IOCL for the entire output from the Bhaskar field, subject to meeting quality requirements. While Bhaskar-I output will peak over the next couple of years and decline thereon, the company has been awarded six more oilfields over fiscals 2022-2024, of which four are exploratory fields awarded in OALP VI, VII and VIII rounds and two are discovered fields awarded in DSF round III.

 

  • Low cost of production resulting in strong operating efficiency: The cost of production at the Bhaskar field (inclusive of taxes) is comfortable at $25-30 per bbl at the current production level, ensuring relative competitiveness even at lower crude oil prices. The company ramped up production volume over the first nine months of fiscal 2024 significantly to around 6,000 bbl per day. Five new wells were drilled during these nine months and another 12 wells will be drilled till fiscal 2026. Even if prices of crude oil settle below $70 per bbl over the medium term, the operating margin will remain comfortable, given the low cost of production.

 

  • Healthy financial risk profile: The financial risk profile of the company improved sharply in fiscal 2023 and remained healthy in the first nine months of fiscal 2024 with ramp-up of production volume from the Bhaskar oilfield. As on September 30, 2023, total debt on the balance sheet was Rs 1,195 crore and cash and equivalent was Rs 26 crore. Cash accrual was around Rs 489 crore for the first nine months of fiscal 2024 and is expected over Rs 700 crore in the next couple of years, which will sufficiently cover annual capex of Rs 200 crore for the existing oilfield. SPPL is also expected to undertake capex of over Rs 2,500 crore over the medium term for exploration and production from the newly awarded oilfields. CRISIL Ratings expects the financial risk profile to remain comfortable as the proposed capex will be funded through strong accrual from existing oilfields and funds proposed to be raised through NCDs/ bank loans/promoter loans.

 

CRISIL Ratings notes that while SPPL has undertaken certain investments in non-core fellow subsidiaries and group companies of over Rs 1,200 crore as on September 30, 2023, it expects to wind down these investments over the near to medium term. Any further increase in such investments will remain a key monitorable.

 

  • Strong support from the parent, SFPL: SPPL is promoted by SFPL, an investment company of Mr Dilip Shanghvi (promoter of Sun Pharmaceutical Industries Ltd [SPIL; ‘CRISIL AAA/Stable/CRISIL A1+’]). The parent will continue to provide need-based financial and managerial support and hold majority stake in the business. SFPL has a strong credit risk profile underpinned by its 40.3% holding in SPIL, amongst other holdings in group companies, which was worth Rs 121,000 crore as on December 31, 2023, vis-à-vis debt (including corporate guarantees) of around Rs 3,000 crore.

 

Weaknesses:

  • Exposure to geological risks for ramping up production: While reserves for the existing oilfields are proven, geological risks exist as the company will need to drill additional wells to ramp up production volume. The company plans to drill 12 more wells over the medium term to ramp up production at the Bhaskar field. Timely drilling of additional wells and ramp-up in production will be monitorables.

 

  • Susceptibility to fluctuations in realisations and foreign exchange (forex) rates: Realisations from the output are benchmarked to the Bonny Light Oil price index (with a discount of 8-9% currently depending on the prices and composition of the index), quoted in dollars. Hence, adverse movement in the oil prices or forex rates could have a direct impact on the operating profitability of SPPL as revenue would get affected without any corresponding decline in the production cost. The company proactively hedges its forex risk to protect its performance.

Liquidity: Strong

SPPL is expected to generate cash accrual over Rs 750 crore per annum over fiscals 2024-2025 driven by ramp-up in production. The accrual, along with funds proposed to be raised through NCDs/bank loans/promoter loans, will be sufficient to fund the capex for the existing as well as new oilfields. Sanctioned bank limit of Rs 2,345 crore remains moderately utilised (with utilization of ~Rs 1,600 crores towards bank guarantees provided for new oilfields) and liquid surplus was low at Rs 26 crore as on September 30, 2023. The company continues to enjoy strong support from SFPL.

Outlook: Stable

The credit risk profile of SPPL will remain stable over the medium term, supported by improved output and healthy realisations from existing oilfields. While the company is undertaking significant capex to develop the newly awarded oilfields, it will exercise prudence in its implementation, phasing and funding.

Rating Sensitivity factors

Upward factors

  • Improvement in the credit risk profile of SFPL by 1 notch.
  • Sustained improvement of the financial risk profile.
  • Significant increase in production volume resulting in higher-than-expected cash accrual.

 

Downward factors

  • Any moderation in the support philosophy of SFPL or weakening in the credit risk profile of SFPL by more than 1 notch.
  • Sustained decline in volume weakening the debt protection metrics.

About the Company

Incorporated in 1995, SPPL is privately held by the promoters of SPIL through investment company SFPL, which owns 40.30% stake in SPIL.

 

SPPL manufactures acetylene carbon black from acetylene gas for battery manufacturing and other niche applications. In 2014, the company entered the upstream oil and gas business, and holds the development and production rights for four fields in Gujarat. It has also recently been awarded six more oilfields.

Key Financial Indicators

Particulars

Unit

2023

2022

Revenue

Rs crore

1,368

586

Profit after tax (PAT)

Rs crore

510

325

PAT margin

%

37.3

55.4

Adjusted debt / adjusted networth

Times

1.33

2.81

Interest coverage

Times

15.02

17.97

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. 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 crore)

Complexity

level

Rating assigned

with outlook

NA

Commercial paper

NA

NA

7-365 days

400

Simple

CRISIL A1+

INE0IWA08012

Non-convertible debentures

16-Sep-2022

7.50%

29-Apr-2024

475

Complex

CRISIL AA/Stable

NA

Non-convertible  debentures*

NA

NA

NA

525

Simple

CRISIL AA/Stable

NA

Non-convertible debentures*

NA

NA

NA

1000

Simple

CRISIL AA/Stable

*Not yet placed

Annexure - Rating History for last 3 Years
  Current 2024 (History) 2023  2022  2021  Start of 2021
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper ST 400.0 CRISIL A1+   -- 23-02-23 CRISIL A1+ 02-03-22 CRISIL A1+ 07-05-21 CRISIL A1+ --
Non Convertible Debentures LT 2000.0 CRISIL AA/Stable   -- 23-02-23 CRISIL AA/Stable 02-03-22 CRISIL AA/Stable   -- --
All amounts are in Rs.Cr.

                  

Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Upstream Oil and Gas Sector
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support
CRISILs Criteria for rating short term debt

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