Fitch Ratings has today assigned India's Hindustan Petroleum Corporation Limited (HPCL) a National Long-term rating of 'AAA(ind)'. At the same time, agency has assigned a rating of 'AAA(ind)' to its proposed non convertible debenture programme of INR10bn . The Outlook is Negative.
The ratings reflect Hindustan Petroleum Corporation Ltd's (HPCL) majority ownership by the government of India (GoI), its position as one of the three largest public sector oil refining and marketing companies in India, the dominant position occupied by public sector companies in the national oil industry, and its strong linkage with and strategic importance to the state. Fitch employs a top-down basis when analysing the linkage between HPCL and the state, which bases the ratings on GoI's rating rather than HPCL's stand alone credit profile. Fitch notes that the GoI holds a 51.11% stake in HPCL; any reduction in GoI's equity stake in HPCL could warrant a rating review.
While Fitch expects state support to be forthcoming for HPCL, given its role as the government's extended arm for policy implementation, the Negative Outlook reflects the discretionary nature of fuel pricing and the current subsidy sharing mechanism which can create huge spikes in HPCL's borrowings. This, in turn, may pressure its liquidity from time to time. Though GoI ensured that all downstream public sector companies (PSCs) were fully compensated for the under recoveries in FY09, this may only be a one-off initiative that was prompted by the huge inventory losses faced by these companies during the period, and may not be repeated the future. GoI has set up an expert group in FY10 to advise on fuel pricing. While this is a good step, it will unlikely bring any meaningful results unless the recommendations are implemented; Fitch notes that such committees have been established before but few major price-related recommendations have ever been implemented as a result.
HPCL's liquidity position has been increasingly stressed since FY06, due to GoI's price caps on select fuels. This problem was accentuated in H1FY09 when HPCL's debt rose to unprecedented levels in September 2008. Though the consolidated debt declined to INR240.6bn (standalone: INR227.5bn) in March 2009 and even further in June 2009, it has started increasing from Q3FY10. Also, the sheer size and timeliness of oil bond allocation, issuance and liquidation can create huge spikes in borrowings, and has led to a very high portion of total debt being comprised of short-term debt over the past four financial years. However, Fitch notes that HPCL has good access to external financing, which can provide a cushion to liquidity, if required.
If HPCL's net under-recoveries remain high, without the establishment of a well-defined mechanism for the timely issue and liquidation of oil bonds, the company's ratings will be downgraded. Any significant reduction in net under-recoveries, as well as the institution of a mechanism for providing timely support could result in the Outlook being revised to Stable.
HPCL, formed in 1974, operates 2 major refineries in Mumbai and Vishakapatnam with a capacity of 5.5mmtpa and 7.5mmtpa respectively. HPCL holds an equity stake of 16.95% in Mangalore Refinery & Petrochemicals Limited (MRPL) which has a capacity of 9mmtpa. In addition, HPCL is constructing a 9mmtpa refinery under a joint venture in Punjab. It recorded consolidated revenues of INR1.1trn (FY08:INR1trn) and operating EBITDAR of INR32.7bn (FY08: INR19.2bn) which included INR146.9bn of oil bonds in FY09.
Additional information is available at www.fitchratings.com.
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