Singapore, October 01, 2018 -- Moody's Investors Service has affirmed the Ba1 corporate family
rating (CFR) of HPCL-Mittal Energy Limited (HMEL).
At the same time, Moody's has affirmed HMEL's Ba2 senior
unsecured bond rating.
The outlook on the ratings is stable.
RATINGS RATIONALE
"The ratings affirmation for HMEL reflects our expectation that
the company's earnings will improve during the fiscal year ending
March 2019, because of the improvement in plant utilization levels,
healthy refining margins and the weaker Indian rupee," says
Vikas Halan, a Moody's Senior Vice President.
"The higher earnings will compensate for the increase in the company's
borrowings, which will in turn be because of HMEL's ongoing
petrochemical capacity expansion," adds Halan. "Overall,
we expect the credit metrics of the company to continue to support its
ratings."
HMEL reported a 20% decline in EBITDA for the fiscal year ended
31 March 2018 (fiscal 2018) as compared to fiscal 2017, following
an extended shutdown in the first quarter of the same year. The
86-day shutdown was almost double the company's original
expectation of 45 days. The delay was caused by complications relating
to the integration of the company's incremental refinery capacity.
The refinery has since been operating at above 100% utilization
level for the past 15 months.
During fiscal 2018, HMEL increased its refining capacity to 11.3
million tons per annum (mtpa) from 9 mtpa.
Despite downward pressure on refining margins following the increase in
crude oil prices to more than USD80 per barrel, Moody's expects
refining margins to stay healthy because of resilient middle distillate
margins, driven by regulations that restrict the use of heavy fuel
oil in the shipping industry from 2020.
Moody's expects HMEL's EBITDA for fiscal 2019 to reach INR58-INR60
billion as compared to INR45 billion for fiscal 2018.
About 76% of HMEL's borrowings as of March 2018 were denominated
in USD, and will increase because of the depreciation in the INR.
Nevertheless, the company's planned capital spending for its
petrochemical capacity expansion is largely denominated in INR.
Consequently, the INR depreciation is positive for HMEL on a net
basis.
Moreover, the increase in HMEL's earnings will result in the
company being able to fund a larger proportion of its capital spending,
as against Moody's earlier expectations. However, this
capital spending will result in company generative negative free cash
flows such that its credit metrics will weaken.
HMEL's debt/ EBITDA for fiscal 2018 was 4.3x and will stay
at a similar level in fiscal 2019 despite the increase in borrowings.
This is because of improvement in its EBITDA in fiscal 2019. Beyond
this, Moody's expects HMEL's debt/ EBITDA to increase
to about 4.6x-4.8x until the completion of the petrochemical
capacity expansion. This leverage level can be tolerated within
the standalone profile of HMEL.
HMEL's CFR is supported by the company's high complexity refinery that
generates high refining margins, and a 15-year offtake agreement
with HPCL that provides high visibility on sale volumes.
The rating, however, is constrained by the company's
moderate scale of operations, with a single refinery, single
crude distillation unit and exposure to the cyclical nature of the refining
industry. HMEL's CFR also takes into account Moody's
expectation that the company's credit metrics will remain pressured
until at least 2021, because of its planned expansion into petrochemicals
at a cost of INR200 billion.
HMEL's Ba1 CFR incorporates a two-notch uplift, based
on Moody's expectation that the company will receive extraordinary
support from its shareholder and key offtaker, Hindustan Petroleum
Corporation Limited (HPCL, Baa2 stable). This reflects HMEL's
strategic importance to HPCL, HMEL's 49% ownership
by HPCL, as well as HPCL's management oversight and track record
of providing financial and operational assistance to HMEL.
At 31 March 2018, 76% (91% at 31 March 2017) of the
total debt in HMEL's capital structure was secured. As such,
the claims of bondholders are subordinated to those of secured lenders.
Consequently, Moody's rates the company's senior unsecured
bonds one notch below its CFR.
The stable ratings outlook reflects Moody's view that the company
will continue to maintain high utilization levels at its refinery,
resulting in healthy margins and strong operating cash flow, which
will be sufficient to partly fund the ongoing expansion of HMEL's
petrochemical production capacity, such that the company's
credit metrics will continue to support its standalone credit profile.
Moody's will unlikely upgrade the ratings over the next 2-3
years, given HMELs expansion of its petrochemical segment,
which will keep its leverage elevated until at least fiscal 2021.
Downward pressure on the ratings could build, if there is a sustained
decline in either refining margins or operational efficiency, resulting
in lower cash flow generation, such that the borrowings needed for
the expansion project are substantially higher than Moody's projections.
This situation could result in the deterioration of HMEL's credit
metrics beyond Moody's expectations.
Specifics metrics that would indicate downward ratings pressure during
the project construction phase include adjusted debt/EBITDA above 5.0x
and EBIT/Interest below 2.5x.
Moody's could downgrade the ratings, if HMELs credit metrics
fail to recover after project completion and stabilization, such
that debt/EBITDA stays above 4.0x and EBIT/interest stays below
3x.
HMELs ratings could also face downward pressure if: (1) Moody's
downgrades HPCL's ratings, or (2) there is any change in the
relationship between HPCL and HMEL that lowers Moody's assessment
of the level of support incorporated into HMEL's ratings.
The principal methodology used in these ratings was Refining and Marketing
Industry published in November 2016. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
HPCL-Mittal Energy Limited, which commenced operations in
2011, owns an 11.3 million metric tons per annum (mmtpa)
refinery in Bathinda, Punjab, with a Nelson Complexity Index
of 12.6, making it one of the highest complexity refineries
in Asia.
The company is a joint venture between Hindustan Petroleum Corporation
Ltd. and Mittal Energy Investment Pte Ltd, with each holding
a 49% shareholding. The remaining 2% is held by Indian
financial institutions.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Vikas Halan
Senior Vice President
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
