| HAL Offshore Limited | ||||||
| Ratings removed from 'Watch Developing'; Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale
Earlier, CRISIL Ratings had placed the ratings on ‘watch developing’ following an announcement by its listed subsidiary, Seamec Ltd (Seamec; ‘CRISIL A/Stable’). On November 2, 2021, the board of Seamec had approved a proposal for restructuring its business with its parent, HAL Offshore Ltd. Since the proposal was in its initial stages, the impact of this restructuring proposal on the credit risk profile of Seamec was not ascertainable. As on December 31, 2021, HAL held 70% stake in Seamec.
Now, Seamec’s board in its meeting held on March 28, 2022, approved a draft scheme of arrangement wherein the marine, EPC, and other ancillary businesses of HAL would be transferred to Seamec. While the corresponding operating assets and liabilities of the company would also be transferred, the cash investments and asset/liabilities not related to operations would remain with HAL. As a consideration for this transaction, Seamec would issue 20.17 equity shares of Rs. 10 each, credited as fully paid up, to the equity shareholders of HAL for every 100 equity shares of Rs 10 each held in HAL. Further, Seamec would also issue 33.76 optionally convertible preference shares of Rs 10 each, credited as fully paid up, to the equity shareholders of HAL for every 100 equity shares of Rs 10 each held in HAL. This restructuring is subject to requisite regulatory approvals and is expected to be effective April 01, 2023.
Post restructuring, HAL would principally become a holding company of the MM Agarwal group in the oil and gas segment and would focus on exploring investment opportunities in this space.
The ratings continue to factor in the established market position of HAL in providing multi support vessels (MSVs) on a charter hire basis to offshore exploration & production (E&P) players in India and its growing presence in the EPC services segment. The ratings also take comfort from the long-term contracts executed for chartering the MSVs and the strong order book position for the EPC services business, offering strong revenue visibility. The company has a healthy financial risk profile too, with a net debt-free position as on December 31, 2021. These strengths are partially offset by exposure to client concentration risk and susceptibility of operating performance to fluctuations in crude oil prices, which are inherently volatile. |
Analytical Approach CRISIL Ratings has taken a consolidated view and combined the business and financial risk profiles of HAL and its subsidiaries, as these entities are engaged in a similar line of business and have strong operational and managerial linkages.
CRISIL Ratings will revaluate its analytical approach as and when more clarity emerges on the business plans and strategic intent of HAL Offshore Ltd post completion of the restructuring. The same would also be a key rating sensitivity factor.
Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths Established market player in the vessel hire business HAL, alongwith its subsidiary, Seamec, has established its market presence in providing MSVs on a charter hire basis to offshore E&P players in India, namely Oil & Natural Gas Corporation Ltd. (ONGC). These services continue to be of importance to E&P players, considering the increased focus on enhancing the output from domestic oilfields and ageing assets. While there could be continued requirement for existing owned vessels, future growth opportunities from this segment could be limited. HAL is accordingly focusing on expanding its business presence in the EPC services segment.
Comfortable operating performance The long-term contracts executed to charter MSVs (owned or leased), provides medium-term visibility on expected revenue from this segment. The vessel hire services business contributes to about 60% of total operating revenue, wherein healthy operating margin of 50-60% is earned on the owned fleet. Both HAL and Seamec are in the process of replacing their aged vessels, which would then reduce the redeployment risk. To further diversify its revenue, HAL has ventured into the EPC services segment, which generates operating margin of 17-20%.
The overall revenue and operating margins are, however, susceptible to redeployment risk associated with vessels that are deployed on a spot basis.
Healthy financial risk profile HAL’s financial risk profile is driven by comfortable gearing and adequate liquidity. Against the outstanding debt of Rs 219 crore, HAL has maintained cash balance of Rs 771 crore as on March 31, 2021 and is thus a net debt-free company. The financial metrics are comfortable, with gearing of 0.17 time and interest coverage ratio of 18.27 times as on March 31, 2021. Even though both HAL and Seamec are in the process of replacing their aged fleets, the liquidity available in the books should be sufficient to fund this capex and, hence, dependence on external funding is expected to be low.
Weaknesses Exposed to client concentration risk The diving support vessels (DSV) services are provided for offshore oilfields in India, exploration rights for which are majorly owned by ONGC. This exposes HAL to client concentration risk. While having a strong client is beneficial to the company in terms of receiving timely payments, it could reduce the negotiation ability of the company while contracting its fleet. Over the years, HAL has been focusing on increasing its presence in the EPC services business which should gradually reduce client concentration risk.
Susceptibility of charter rates to inherent volatility in crude oil prices Profitability and cash flow in the offshore business depend on offshore charter rates, which are influenced by offshore and deep-water expenditure by oil majors. Offshore and deep-water block investments, which are larger than those in onshore blocks, are highly sensitive to crude oil prices. With slowdown in global oil and gas E&P capex, demand for offshore equipment’s declined, resulting in a fall in charter rates for offshore vessels and rigs by more than 50% in the past six years. However, charter rates of the vessels deployed by HAL have remained stable in the past, despite fluctuations witnessed in crude oil prices. |
Liquidity: Strong At a consolidated level, HAL had cash and cash equivalent of Rs 771 crore as on March 31, 2021. The company is expected to generate cash accrual of Rs 350-400 crore in fiscals 2022 and 2023. The annual accrual generated as well as the surplus liquidity maintained, would be sufficient to meet its near-term annual debt obligation of Rs. 70 crore and Rs 32 crore, respectively, in fiscals 2022 and 2023. Considering sufficient liquidity maintained, the company has low dependence on working capital funding.
As part of the draft scheme of arrangement, the external debt (as on effective date) pertaining to the business being transferred would also move to Seamec and will be serviced through the latter’s healthy cash accruals. |
Outlook Stable Business and financial risk profile is expected to remain comfortable, supported by its established market presence in the vessel hire business and healthy financial risk profile maintained. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Incorporated in 1996, as part of the MM Agarwal group, HAL is an end-to-end solutions provider of underwater and EPC services to the Indian oil and gas industry. Over the years, it has developed a diversified portfolio, which includes turnkey projects involving sub-sea and marine services and an EPC contracts. Services offered by HAL are certified by independent agencies such as the American Bureau of Shipping (ABS), DNV, LR as per requirements of the client.
HAL holds a 70% stake in Seamec, with the balance held by the public. The company operates in two distinct verticals of the shipping business - offshore support & services and bulk carrier charter business. |
Key Financial Indicators
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' 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)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||
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This Annexure has been updated on 06-Mar-22 in line with the lender-wise facility details as on 14-Dec-21 received from the rated entity.
Criteria Details
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