Rating Rationale
July 03, 2020 | Mumbai
Bharat Oman Refineries Limited
'CRISIL AA+/Watch Developing' assigned to NCD ; Long-term rating continues on 'Watch Developing' 
 
Rating Action
Total Bank Loan Facilities Rated Rs.16387 Crore
Long Term Rating CRISIL AA+ (Continues on 'Rating watch with Developing Implications')
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.600 Crore Non Convertible Debentures CRISIL AA+ (Assigned; Placed on 'Rating Watch with Developing Implications')
Rs.300 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL AA+' rating to the non-convertible debentures (NCD) of Bharat Oman Refineries Limited (BORL) and placed it on 'Rating Watch with Developing Implication'. The rating on long-term bank facilities continue on 'Rating watch with Developing Implications' and rating on short-term bank facilities and commercial paper programme has been reaffirmed at 'CRISIL A1+'.
 
CRISIL 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 holds 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. CRISIL will reassess 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.
 
Given the strength of BPCL's credit profile and considering that the buyer, assuming the divestment concludes, is likely to be a global oil and gas major, the ratings could be reaffirmed on resolution of the watch. CRISIL 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 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:
* Strategic importance to BPCL
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. Amongst the 1147.19 million share warrants held by BPCL, in March 2020, 361.11 million warrants were converted into equity shares; thus increasing its equity stake in BORL to 63.38%, from 50% previously. BORL would now become a subsidiary of BPCL. Nevertheless, considering the total capital invested in BORL, BPCL's effective stake would remain at 78%. Any deviation in support, post completion of the divestment process, remains a key monitorable.
 
* Strong operating performance
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. Performance is however expected to rebound in fiscal 2021.
 
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). Due to a subdued demand environment amidst the Covid-19 pandemic, the plant operated at a low utilisation of around 50% in April and May. With the gradual easing of lockdown restrictions, utilisations have ramped up to around 80% currently.
 
Weaknesses:
* Moderate financial risk profile
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.
 
* Susceptibility to volatility in crude oil prices
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 should remain strong, aided by expected cash accrual of over Rs 1,000 crore per annum. The company has debt obligation of close to Rs 1700 crore in fiscal 2021, and Rs 260 crore in fiscal 2022. Debt obligation is likely to be funded through 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 2,000 crore.

Rating Sensitivity factors
Upward factors:
* Improvement in financial risk profile through increased profitability, infusion of promoter funds, induction of new partners, or an initial public offering, such that net cash accrual to adjusted debt ratio improves to 0.20 time
* Stronger stance of parental support, in terms of increased criticality or higher shareholding; on obtaining clarity of the divestment process
 
Downward factors:
* Larger-than-expected debt-funded capital expenditure, weakening the gearing to over 4 times
* Any change in shareholding or in the credit risk profile of BPCL, or in stance of support
About the Company

BORL was initially incorporated as a joint venture between BPCL and Oman Oil Company SAOC, 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.
 
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
Particulars Unit 2020* 2019
Revenue Rs Cr. 30,386 23,858
Profit After Tax Rs Cr. -804 107
PAT Margin % -2.65 0.45
Adjusted Debt/Adjusted Networth Times 2.94 2.32
Interest Coverage Times 1.34 2.64
*Based on provisional financials 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size
(Rs Cr)		 Complexity Levels Rating Assigned
with Outlook
NA Fund-Based Facilities NA NA NA 2000.00 NA CRISIL AA+/Watch Developing
NA Fund-Based Facilities* NA NA NA 1250.00 NA CRISIL AA+/Watch Developing
NA Non-Fund Based Limit NA NA NA 4950.00 NA CRISIL A1+
NA Proposed Fund-Based Bank Limits NA NA NA 2898.26 NA CRISIL AA+/Watch Developing
NA Term Loan NA 8.40% 30-Jun-27 1737.00 NA CRISIL AA+/Watch Developing
NA Term Loan NA 8.70% 30-Jun-27 2250.00 NA CRISIL AA+/Watch Developing
NA Term Loan NA NA 30-Jun-27 392.10 NA CRISIL AA+/Watch Developing
NA External Commercial Borrowings NA NA 24-Dec-20 864.64 NA CRISIL AA+/Watch Developing
NA Short Term Bank Facility NA NA NA 45.00 NA CRISIL A1+
NA Commercial Paper NA NA 7-365 days 300.00 Simple CRISIL A1+
NA Non-Convertible Debentures$ NA NA NA 600.00 Complex CRISIL AA+/Watch Developing
*Fully interchangeable with non-fund based limits
$Yet to be placed
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  300.00  CRISIL A1+  27-05-20  CRISIL A1+  29-11-19  CRISIL A1+  27-04-18  CRISIL A1+  22-08-17  CRISIL A1+  CRISIL A1+ 
        26-02-20  CRISIL A1+  03-10-19  CRISIL A1+           
            24-04-19  CRISIL A1+           
Non Convertible Debentures  LT  0.00
03-07-20  		CRISIL AA+/(Watch) Developing    --    --    --    --  -- 
Fund-based Bank Facilities  LT/ST  11437.00  CRISIL AA+/(Watch) Developing/ CRISIL A1+  27-05-20  CRISIL AA+/Watch Developing/ CRISIL A1+  29-11-19  CRISIL AA+/Watch Developing/ CRISIL A1+  27-04-18  CRISIL AA+/Stable/ CRISIL A1+  22-08-17  CRISIL AA+/Stable/ CRISIL A1+  CRISIL AA/Positive/ CRISIL A1+ 
        26-02-20  CRISIL AA+/Watch Developing/ CRISIL A1+  03-10-19  CRISIL AA+/Stable/ CRISIL A1+           
            24-04-19  CRISIL AA+/Stable/ CRISIL A1+           
Non Fund-based Bank Facilities  LT/ST  4950.00  CRISIL A1+  27-05-20  CRISIL A1+  29-11-19  CRISIL A1+  27-04-18  CRISIL A1+  22-08-17  CRISIL A1+  CRISIL A1+ 
        26-02-20  CRISIL A1+  03-10-19  CRISIL A1+           
            24-04-19  CRISIL A1+           
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
External Commercial Borrowings 864.64 CRISIL AA+/Watch Developing External Commercial Borrowings 864.64 CRISIL AA+/Watch Developing
Fund-Based Facilities 2000 CRISIL AA+/Watch Developing Fund-Based Facilities 2000 CRISIL AA+/Watch Developing
Fund-Based Facilities* 1250 CRISIL AA+/Watch Developing Fund-Based Facilities* 1250 CRISIL AA+/Watch Developing
Non-Fund Based Limit 4950 CRISIL A1+ Non-Fund Based Limit 4950 CRISIL A1+
Proposed Fund-Based Bank Limits 2898.26 CRISIL AA+/Watch Developing Proposed Fund-Based Bank Limits 2898.26 CRISIL AA+/Watch Developing
Short Term Bank Facility 45 CRISIL A1+ Short Term Bank Facility 45 CRISIL A1+
Term Loan 4379.1 CRISIL AA+/Watch Developing Term Loan 4379.1 CRISIL AA+/Watch Developing
Total 16387 -- Total 16387 --
*Fully interchangeable with non-fund based limits
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Petrochemical Industry
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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