BHARAT PETROLEUM CORPORATION LIMITED
Fitch Ratings has affirmed
The Outlook is Stable. We have also affirmed BPCL's senior unsecured rating and the ratings on its outstanding senior unsecured debt at 'BBB-'. Fitch has also affirmed the rating on subsidiary
Fitch equates BPCL's rating with its largest shareholder,
We maintain BPCL's Standalone Credit Profile (SCP) at 'bb+', as we expect net leverage to improve to a level in line with the SCP from the financial year ending
The Indian government called off BPCL's strategic divestment process in
Key Rating Drivers
Strength of State Linkage: Fitch assesses BPCL's status, ownership and control by the sovereign as 'Strong'. The state directly owns 53% and appoints the board. The record of state support is also 'Strong'. BPCL has in the past received tangible support from
Government Incentive to Support: We see the socio-political implications of a default by BPCL as 'Very Strong'. It would disrupt economic activity and significantly affect
Marketing Margins Under Pressure: Fitch expects BPCL to generate gross marketing losses in FY23, as the Indian OMCs bear the largest burden of surging crude oil prices, with only limited increases being passed on to consumers despite cuts in taxes on retail sales. We believe near-term prices will remain a function of the government's efforts to balance OMCs' financial health with inflationary and fiscal pressures. However, the marketing segment should turn profitable from FY24 as crude oil prices fall to Fitch's assumption of
We expect marketing margins to remain aligned with crude oil prices over the long term. The government previously allowed OMCs to recoup losses from the temporary suspension of daily price resets in subsequent periods. However, prolonged state interference in auto-fuel retail prices and marketing losses could be negative for BPCL's SCP.
Temporary Weakness in Credit Metrics: We expect BPCL's debt to increase in FY23 on EBITDA losses, and net debt/EBITDA to remain marginally higher than the negative trigger for its SCP of 3.0x in FY24 (FY22: 2.3x). However, falling crude oil prices and the resultant reversal in marketing losses would improve leverage to levels commensurate with the SCP from FY25. This deleveraging is subject to the risk of a prolonged period of high crude oil prices squeezing marketing margins.
Potential LPG Subsidies: Media indicates that OMCs may receive government support in FY23 to partly cover under-recoveries from inadequate pass-through of imported LPG prices since 2HFY22, and the re-introduction of government subsidies on LPG cylinders since
Demand Above Pre-Pandemic Levels: Fitch expects BPCL's marketing volumes to rise to around 48 million metric tons (MMT) in FY23, from 44.6MMT in FY22. This is based on our expectation of a 7% growth in
GRMs Above Historical Highs: BPCL reported record gross refining margins (GRMs) of
Product spreads have since narrowed on easing of tight industry conditions and emerging worries over the demand impact of a potential global recession. Nonetheless, spreads for diesel, which forms around 45% of BPCL's product slate, remain well above long-term historical averages and should support GRMs, notwithstanding the recent correction in petrol cracks. We expect GRMs to moderate in the rest of FY23, with the full-year average of
High Capex: Fitch expects annual capex of INR100 billion over FY23-FY26, with most spent on the marketing, petrochemical and refining segments. BPCL seeks to add around 1,500 retail outlets per year for the next few years. Pre-project activities are ongoing to set up a 1.2 million tonne per annum (mtpa) ethylene cracker at its
Dominant Market Position: BPCL's SCP reflects its position as one of
Derivation Summary
BPCL's closest peers under Fitch's GRE Rating Criteria are
Fitch's assessment of all GRE factors is the same for both
Key Assumptions
Fitch's key assumptions within our rating case for the issuer include:
Brent crude oil at
FY23 refining throughput and marketing volume at or above pre-pandemic levels, and demand growth of 2%-3% thereafter.
GRM of
Marketing losses in FY23, gradually improving to normal levels by FY24.
Annual capex of INR100 billion over FY23-FY26.
Dividend payout ratio of around 60% over FY24-FY26 (versus management expectation 30% - 40%).
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of the sovereign rating, provided the likelihood of support from the state remains strong
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A downgrade of the sovereign rating
Likelihood of support from the state declines significantly
For the sovereign rating of
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Public Finances: Rising general government debt/GDP ratio, for instance, from insufficient fiscal consolidation
Macro: A structurally weaker real GDP growth outlook, for instance, due to financial-sector weakness or reform implementation that is lacking, further weighing on the debt trajectory
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Public Finances: Implementation of a credible medium-term fiscal strategy to bring post-pandemic general government debt down towards the levels of 'BBB' category peers
Macro: Higher medium-term investment and growth rates without the creation of macroeconomic imbalances, such as from successful structural reform implementation and a healthier financial sector
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Strong Funding Access: BPCL had cash and equivalents of INR66 billion and sanctioned undrawn credit lines of INR150 billion at FY22. It has INR196 billion of debt maturities in FY23, including INR121 billion of current maturities of long-term debt. We expect BPCL to roll over its short-term debt, on account of its robust operating profile.
We expect BPCL to report neutral to negative free cash flow in the next few years, although it should secure adequate funding, if needed, due to its ready access to domestic and international capital and banking markets, strong linkages with the sovereign, and importance in maintaining
Issuer Profile
BPCL, which is majority owned by the state, is the third-largest refiner in
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
BPCL's Long-Term IDR is equalised with that of the Indian sovereign. A change in Fitch's rating on the sovereign would automatically result in a change in the company's ratings.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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