| SUN Petrochemicals Private Limited | ||||||
| 'CRISIL AA/Stable' assigned to Non Convertible Debentures | ||||||
| Rating Action | ||||||
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| 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 assigned its 'CRISIL AA/Stable' rating to the proposed non-convertible debentures (NCDs) of SUN Petrochemicals Pvt Ltd (SPPL) and has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the existing NCDs and commercial paper programme.
The ratings centrally factor in the strong operational setup and management of the company, and the 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, strong offtake agreement with Indian Oil Corporation Ltd (IOCL; ‘CRISIL AAA/Stable/CRISIL A1+’) for the entire production, and improving financial risk profile with comfortable debt protection metrics.
These strengths are partially offset by inherent geological risks in scaling up production, low share of profit after recovery of capital expenditure (capex) and susceptibility of the operating performance to fluctuations in crude oil prices.
Significant ramp-up in volume during the first nine months of fiscal 2023 helped increase revenue for the period to Rs 978 crore from Rs 566 crore for fiscal 2022. Operating margin improved to around 74% from 71% in fiscal 2022, driven by higher crude oil prices. Even if crude oil prices settle around $60 per barrel (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 the strong parental support from 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 fields in Gujarat: Baola, Modhera, Hazira and Bhaskar. The Bhaskar oilfield is the main block, wherein production has ramped up beyond 5,000 bbl per day and SPPL expects a peak of 7,500 bbl per day over the medium term. SPPL has an offtake agreement with IOCL for the entire output from the Bhaskar field, subject to meeting the quality requirements.
The company was recently awarded five more fields, of which three are exploratory fields awarded in the Open Acreage Licensing Programme (OALP) VI and VII rounds and two are discovered fields awarded in the Discovered Small Fields (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 around $24/bbl at the current production level, ensuring relative competitiveness even at lower crude oil prices. SPPL ramped up production volume over the first nine months of fiscal 2023 significantly, to around 5,100 bbl/day from an average of 2700 bbl/day in fiscal 2022. Two new wells were drilled during these nine months and the volume is expected to increase further with 16 new wells to be drilled over the medium term. Revenue rose to Rs 978 crore in the first nine months of fiscal 2023 from Rs 566 crore for fiscal 2022 and operating margin improved to around 74%, contributed by rise in crude oil prices. Even if prices of crude oil settle at around $60/bbl over the medium term, the operating margin will remain comfortable, given the low cost of production.
Healthy financial risk profile There has been a sharp improvement in the financial risk profile of the company since fiscal 2021, with ramp-up of production volume from the Bhaskar oilfield. As of September 30, 2022, the total debt on the balance sheet was Rs 785 crore along with cash and equivalent of Rs 10 crore. Cash accrual was around Rs 658 crore for the first nine months of fiscal 2023 and is expected above Rs 900 crore over the medium term, which will be sufficient to fund annual capex of Rs 200 crore for the existing oilfield. SPPL plans capex of around Rs 2,500 crore over the medium term for exploration and production from the newly awarded oilfields. CRISIL Ratings believes the financial risk profile of SPPL will remain comfortable given that the proposed capex will be funded through strong accrual from the existing oilfields and the proceeds of the proposed NCDs.
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+’]). SFPL is expected to continue to provide the required financial and managerial support and hold a majority stake in the business. SFPL has a strong credit risk profile underpinned by its 40.3% holding in SPIL, which was worth Rs 97,000 crore as on February 13, 2023, vis-à-vis total debt (including corporate guarantees) of around Rs 2,100 crore.
Weaknesses: Exposure to geological risks for ramping up production volume While reserves for the existing oilfields are proven, geological risks persist as the company will need to drill additional wells to ramp up production volume. The company plans to drill 16 more wells over the medium term to ramp up production from about 5000 bbl/day at present to 7500 bbl/day. 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 extracted are benchmarked to the Bonny Light Oil price index (with a 4.5% discount), quoted in dollars. Hence, any adverse movement in either the oil prices or forex rates could have a direct impact on the operating profitability of SPPL, as revenue would then get affected without any corresponding decline in the production cost. Hence, SPPL proactively hedges its forex risks to protect its overall performance. |
Liquidity: Strong SPPL is expected to generate annual accrual of Rs 900-1000 crore over fiscals 2023 to 2025, driven by ramp-up in production. The accrual, along with funds proposed to be raised through NCDs, will be sufficient to fund the proposed capex for the existing as well as new oilfields. The company continues to enjoy strong support from SFPL. |
Outlook Stable SPPL’s credit risk profile is expected to remain stable over the medium term, supported by improved output and healthy realisations from the existing oilfields. While the company is undertaking significant capex to develop the newly awarded oilfields, CRISIL Ratings believes it will exercise prudence in its implementation, phasing and funding. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Incorporated in 1995, SPPL is a privately held company owned by the promoters of SPIL through investment company SFPL, which also owns 40.30% stake in SPIL.
SPPL initially manufactured acetylene carbon black from acetylene gas, for use in 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 was recently awarded five more fields.
For the nine months ended December 31, 2022, SPPL recorded profit after tax (PAT) of Rs 455 crore and revenue of Rs 978 crore, against a PAT of Rs 303 crore and revenue of Rs 468 crore for the corresponding period of the previous fiscal. |
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)
*Not yet placed |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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