India Ratings & Research (Ind-Ra) has affirmed Hindustan Petroleum Corporation (HPCL) long-term issuer rating at 'AAA'. The outlook is stable. The agency has also affirmed HPCL's non-convertible debentures (NCDs) at 'AAA'.
The ratings continue to reflect HPCL's strong strategic and operating linkages with the government of India (GoI), its majority stake holder (51.1%). HPCL is among the top three public sector oil refining and marketing companies (OMCs) in India. The agency expects the state to continue to provide support to HPCL, given its role as the government's extended arm for policy implementation.
GoI's policy has been to set tariffs for some refined oil products at levels lower than market prices, leading to under-recoveries. However, GoI has ensured that public sector OMCs’ annual under recoveries are compensated through budgetary support and direction to upstream public sector companies to supply feedstock at a discount.
In FY14, HPCL registered a gross under recovery of Rs 324.7 billion (FY13: Rs 362.5 billion) and net under recovery of Rs 4.8 billion (Rs 2.3 billion). Ind-Ra expects the gross and net under recovery to reduce substantially in FY15 owing to a substantial fall in the crude oil prices and the deregulation of diesel price (effective Oct. 18, 2014).
HPCL received budgetary support of Rs 152.2 billion in FY14 (FY13: Rs 248.3 billion) and upstream discounts amounting to Rs 167.7 billion (Rs 111.9 billion). The budgetary support has been accounted for on an accrual basis as there is a delay in the realisation of compensation in cash which results in short-term liquidity mismatch. Thus, the OMCs have high working capital borrowings.
The ratings reflect HPCL's strong liquidity, backed by its access to external financing and current investments (FY14: Rs 51 billion). Besides the line of credit, the oil bonds provided by the GoI, as a part of compensation for under recovery (up to FY09), are also sold regularly to generate funds. HPCL has generated positive cash flow from operations in three of the last four years.
HPCL has planned capex of Rs 38 billion and Rs 45 billion in FY15 and FY16, respectively, at a standalone level. Debt repayments at the standalone level are Rs 31.7 billion in FY15 and Rs 89.4 billion in FY16. The agency believes HPCL will have substantial re-financing requirements in FY16 due to lumpy debt repayment; however, given the financial flexibility, the corporation is expected to renew the maturing loans comfortably.
Shares of the company gained Rs 3.1, or 0.59%, to settle at Rs 530.60. The total volume of shares traded was 82,945 at the BSE (Wednesday).
