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Rating Action:

Moody's assigns Baa3 ratings to HPCL's proposed bonds

28 Jun 2017

Singapore, June 28, 2017 -- Moody's Investors Service has assigned a Baa3 rating to the foreign currency senior unsecured bonds to be issued by Hindustan Petroleum Corporation Ltd. (HPCL, Baa3 positive).

The outlook on the rating is positive.

RATINGS RATIONALE

"The bonds will be the senior unsecured obligation of HPCL and as such are rated at par with its long term issuer ratings. Although there is secured debt in HPCL's capital structure and the bonds will be subordinated to such debt, the amount of secured debt is 22% of total debt and 6% of total assets. As such the risk of legal subordination is low,' says Vikas Halan, a Moody's Vice President Senior Credit Officer.

As a government related issuer (GRI), HPCL's Baa3 rating combines its baseline credit assessment (BCA) of ba1 and a one notch uplift under the joint-default analysis methodology for GRIs, given the strong support from the Indian government (Baa3, positive), which has a 51.1% stake in HPCL.

HPCL's BCA reflects its position as India's third largest state owned refiner of crude oil and third-largest distributor of petroleum products in the country. The BCA also reflects the company's modest financial leverage and its potential cash flow volatility as a result of its exposure to industry cyclicality.

Moody's views HPCL -- Mittal Energy Limited (HMEL, Ba1 stable), 49% owned by HPCL, as integral part of HPCL's business profile and hence fully consolidates the company into HPCL's credit profile. For fiscal 2017 ended March 2017, on a fully consolidated basis, HPCL reported a modest increase in its EBITDA and reduction in debt. Consequently debt/ EBITDA declined to 2.2x for fiscal 2017 from 2.5x in fiscal 2016.

However, HPCL's increased its dividend payment in fiscal 2017 to INR42 billion from INR 17 billion in fiscal 2016. This higher dividend resulted in lower retained cash flow (RCF) and consequently, RCF/ debt declined to 24% fiscal 2017 from 30% in the previous year. Despite this deterioration in credit metrics, HPCL's ratings and BCA remain well positioned.

'We expect HPCL to continue to pay high dividends going forward, which will constrain the improvement in its credit profile,' says Halan, who is also Moody's lead analyst for HPCL.

The outlook on HPCL's rating is positive, which reflects the positive outlook on the rating of the Government of India. Its strategic importance to the country continues to support a rating that is in line with the sovereign.

Upward pressure on HPCL's BCA may build up over time, if the company's credit metrics improves meaningfully such that its retained cash flow (RCF)/debt is maintained at more than 25% on a sustained and fully consolidated basis. An upgrade of the BCA will not automatically result in upgrade of the issuer ratings, which will be upgraded only if the sovereign rating is upgraded.

HPCL's issuer rating may face downward pressure if: (1) the sovereign rating is downgraded, (2) the government makes changes to the subsidy framework that are more negative for HPCL, (3) HPCL's BCA deteriorates below ba3, or (4) the government's ownership in HPCL falls below 51% or its control decreases by some other means, both of which would require a reassessment of the level of support incorporated into its ratings.

Downward pressure on HPCL's BCA could build if a) it loses its market share for petroleum product distribution substantially, b) higher competition from non-government players, albeit unlikely in the near term, results in lowering of the marketing margins to levels achieved in 2014, c) HMEL fails to maintain high levels of capacity utilization resulting in overall refining margins for the company to weaken and d) the company embarks on large debt funded capex plan. Moody's will consider downgrading HPCL's BCA to ba2 if its RCF/debt falls below 15% on a fully consolidated basis. A downgrade of BCA will not automatically lead to a downgrade of HPCL's issuer rating.

The principal methodology used in these ratings was Refining and Marketing Industry published in November 2016. Other methodologies used include the Government-Related Issuers methodology published in October 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Hindustan Petroleum Corporation Ltd., headquartered in Mumbai is one of the leading downstream companies in India, specializing in oil refining, marketing, distribution, and the retailing of petroleum products. It is listed on the Indian stock exchanges and is 51.11% owned by the Indian government.

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
VP - Senior Credit Officer
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

No Related Data.
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