| Bharat Oman Refineries Limited | ||||||
| Long-term rating continues on ‘Watch Developing’; short-term rating reaffirmed | ||||||
| Rating Action | ||||||
| ||||||
| ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL's Ratings on the long-term bank facilities and NCDs of Bharat Oman Refineries Limited (BORL) continues to be on 'Rating Watch with Developing Implications'. The rating on the company's short-term bank facilities and commercial paper programme has been reaffirmed at 'CRISIL A1+'.
CRISIL Ratings had placed BORL’s long-term rating on watch, following a similar rating action on Bharat Petroleum Corporation Ltd (BPCL; ‘CRISIL AAA/Watch Developing/CRISIL A1+’), which currently owns a 63.38% stake in BORL. BPCL’s long-term rating was placed on watch, following receipt of approval from the Cabinet Committee on Economic Affairs (CCEA), for strategic divestment of Government of India’s (GoI’s) 52.98% stake in BPCL, along with transfer of management control to a strategic buyer. At the meeting held on December 17, 2020, BPCL’s Board of Directors have accorded their approval to acquire the remaining stake in BORL i.e. 36.62%, currently held by Oman Oil Company SAOC. The company may also approach the Government of Madhya Pradesh (GoMP) to acquire the 26.9 million warrants subscribed by the latter. The takeover is however subject to receiving approval from the competent authorities as well completion of the required formalities.
CRISIL Ratings will reassess the linkages between BPCL and BORL, to take an appropriate rating action, once adequate clarity emerges on the buyer identified for GOI’s stake in BPCL, and the transaction structure thereon. CRISIL Ratings however believes that the impact on the long term rating of BORL, if any, is not expected to be more than one notch.
The ratings continue to reflect BORL’s strategic importance to BPCL, and its healthy operating performance. These strengths are partially offset by the company’s modest financial risk profile and susceptibility of overall performance to volatility in crude oil prices. |
Analytical Approach The ratings factor in BORL’s strategic importance to BPCL, and strong support from the parent via unsecured loans and compulsorily convertible debentures (CCDs). CRISIL Ratings has treated CCDs of Rs 1,000 crore as equity and unsecured loans of Rs 1,254 crore as neither debt nor equity. However, the rating approach may undergo a change, based on outcome of the divestment process. |
Key Rating Drivers & Detailed Description Strengths:
BORL remains strategically important to BPCL, as it is the only refinery in central India, and provides access to markets in central and northern India. BPCL continues to be the sole customer of BORL. In March 2020, amongst the 1147.19 million share warrants held by BPCL, 361.11 million warrants were converted into equity shares; thus increasing its equity stake in BORL to 63.38%, from 50% previously. Considering the total capital BPCL has invested in BORL, it has an effective stake of 78% in the company. On December 17, 2020, BPCL’s Board of Directors have further accorded their approval to acquire the remaining equity stake in BORL i.e. 36.62%, currently held by Oman Oil Company SAOC. This would make BORL a wholly-owned subsidiary of the company. However, any deviation in support from the new parent, post completion of the divestment process of BPCL, remains a key monitorable.
BORL's business risk profile benefits from strong operating efficiency of its refinery, and healthy gross refining margin (GRM) levels. The high Nelson complexity index (NCI) of 11.3, enables the refinery to maximise distillate output and produce a superior product slate, largely comprising premium quality automotive fuels.
The company reported a GRM of $5.6/bbl. for fiscal 2020, as compared to a healthy GRM of $9.8/bbl. for fiscal 2019. The subdued performance has mainly been on account of heavy inventory losses incurred during the fourth quarter of fiscal 2020, caused by a steep crash in crude oil prices. Capacity utilisation was healthy around 103% in fiscal 2020 (up from 84% in fiscal 2019 – wherein the plant was temporarily shut down to undertake capacity expansion).
The subdued demand environment across the globe has weakened the core GRMs for fiscal 2021. While the refinery operated at low utilisation levels of 65% during the first half of fiscal 2021, operations have resumed since then with the current average utilisation at around 80-90%. Over the medium term, with the revival in economy, BORL’s operating performance should continue to remain strong, with an expected annual cash accruals of around Rs 1000 crore.
Weaknesses
Financial risk profile will continue to be aided by healthy cash accrual, and reduction in debt over the medium term. Adequate cash accrual and Rs 1,000 crore infused by BPCL (in fiscal 2017) lent a boost to the capital structure. Nonetheless, gearing remained high at 2.94 times as on March 31, 2020. Debt coverage indicators are moderate, wherein the interest coverage was 1.34 times in fiscal 2020.
Crude oil prices have been volatile over the past few years. Prices fell sharply to around USD 20 per barrel (bbl) as towards end of March 2020, from over USD 69 in the beginning of January 2020. Average inventory of crude oil and finished goods of around 90 days, makes BORL’s operating performance vulnerable to fluctuations in valuations of inventory stock. BORL imports its entire crude oil requirement, and thus remains susceptible to volatility in the rupee-dollar exchange rate, and a corresponding increase in value of imports. Crude oil import will remain high over the medium term. |
Liquidity: Strong Liquidity is strong, aided by annual cash accruals generated of over Rs 1,000 crore. However, the weakened operating performance during the current fiscal has increased the company’s dependence towards working capital debt. The company has debt obligation of close to Rs 1700 crore in fiscal 2021, amongst which Rs 1640 crore has been repaid. The debt obligations are funded through a mix of internal accrual and refinancing. CRISIL believes BPCL is likely to extend financial support during exigencies, given the strategic importance of the refinery to the parent. Liquidity is also supported by available bank lines of Rs 3,195 crore. |
Rating Sensitivity factors Upward Factors
Downward Factors
|
About the Company BORL was initially incorporated as a joint venture between BPCL and Oman Oil Company SAOC (currently OQ), with each party holding a 50% stake in the company. In March 2020, amongst the 1147.19 million share warrants held by BPCL, 361.11 million warrants were converted into equity shares; thus increasing its equity stake in BORL to 63.38%. BPCL however still continues to hold 786.08 million share warrants, while the Government of Madhya Pradesh holds 26.9 million warrants; to be converted into equity shares of BORL in the ratio stated in the subscription agreement.
At the meeting held on December 17, 2020, BPCL’s Board of Directors have accorded their approval to acquire the remaining stake in BORL i.e. 36.62%, currently held by Oman Oil Company SAOC (currently OQ). The company may also approach the Government of Madhya Pradesh (GoMP) to acquire the 26.9 million warrants subscribed by the latter. The takeover is however subject to receiving approval from the competent authorities as well completion of the required formalities.
BORL operates an oil refinery with nameplate capacity of 7.8 tonne per annum in Bina, Madhya Pradesh. The company also owns crude receipt facilities comprising a single-point mooring system in Vadinar, Gujarat, a 935-kilometre cross-country crude oil pipeline from Vadinar to Bina, and a captive co-generation power plant in Bina. |
Key Financial Indicators
|
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
$Fully interchangeable with non-fund based limits *Rs.300 crore interchangeable with fund-based limits #Not yet placed |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|