| HAL Offshore Limited | ||||||
| Rating outlook revised to 'Positive'; Ratings reaffirmed | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its outlook on the long-term bank facilities of HAL Offshore Limited (HAL) to ‘Positive’ from ‘Stable’ while reaffirming its rating at ‘CRISIL A’, while the rating on the short-term bank facilities has been reaffirmed at ‘CRISIL A1’.
The positive outlook reflects CRISIL Ratings’ expectation that HAL’s business profile will improve in the near term owing to the replacement of few aged vessels carried out over the past two fiscals resulting in reduction of redeployment risk. HAL will sustain its established market position in providing multi support vessels (MSVs) on a charter hire basis under long-term contracts 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 in place for chartering the MSVs, noteworthy progress on the planned replacement of its ageing vessel fleet 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 cash position maintained as on March 31, 2023. 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.
CRISIL Ratings understands from the company’ management that the proposal for restructuring its business with the subsidiary, Seamec Ltd (Seamec; CRISIL A/Positive) has been put on hold and there are no restructuring plans under consideration as of now. |
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 with strong operational and managerial linkages.
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:
HAL, along with 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 as well as leased vessels, future growth opportunities from this segment could be limited. Accordingly, HAL has focused on expanding its business presence in the EPC services segment over the past few years, which has resulted in growth in the order book from around Rs 1,900 crore as of September 2021 to around Rs 2,500 crore as of June 2023.
Long-term contracts spanning 3-5 years, executed to charter the MSVs (owned or leased), offer medium-term visibility on expected revenue from this segment. The vessel hire services business contributes to about 65-70% of total operating income, wherein healthy gross 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 associated with the vessels. HAL, along with Seamec, has purchased three new MSVs to replace two of its aged vessels over the past two fiscals and plans to replace the remaining three aged vessels over the medium term. The revenue and operating margins are, however, susceptible to redeployment risk associated with vessels that are deployed on a spot basis.
The balance 30-35% of operating income is contributed by the EPC services segment, which generates an operating margin of 18-20%.
HAL’s financial risk profile is driven by comfortable gearing and adequate liquidity. The company had maintained cash and equivalents of Rs 642 crore against outstanding debt of Rs 311 crore as on March 31, 2023, and was thus, in a net cash position. Financial metrics are comfortable, with gearing of 0.16 time as on March 31, 2023, and interest coverage ratio of 26.75 times for fiscal 2023.
Even though HAL and Seamec are in the process of replacing its aged fleet, liquidity available in the books should suffice to fund capex towards purchase of new vessels. The company may also avail external funding only to ensure that adequate liquidity is available to tide through cyclicality in business operations and avail of any attractive vessel acquisition opportunity, which can be deployed on long-term contracts in the domestic market.
Weaknesses:
The MSV 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. HAL has focussed on increasing its presence in the EPC services business to a diversified clientele, which should reduce client concentration risk gradually.
Profitability and cash flow in the offshore business depend on offshore charter rates, which are influenced by offshore and deep-water expenditure by oil and gas majors. Offshore and deep-water block investments, which are larger than those in onshore blocks, are highly sensitive to crude oil prices. In the past, slowdown in global oil and gas E&P capex has led to decline in demand for offshore equipment, resulting in a sharp fall in charter rates for offshore vessels and rigs.
However, charter rates of the vessels deployed by HAL have been stable in the past and have increased in the recent contract renewals over the past 1-2 years, despite fluctuations in crude oil prices, amidst the continuous production activities taken up by the domestic players. |
Liquidity: Strong At a consolidated level, HAL had cash and cash equivalent of Rs 642 crore as on March 31, 2023. CRISIL Ratings expects the company to generate cash accrual of Rs 450-550 crore over fiscals 2024 to 2026. The annual accrual generated as well as the surplus liquidity maintained, would be sufficient to meet its near-term annual debt obligation of Rs 25-50 crore over fiscals 2024 and 2025. Considering sufficient liquidity maintained, the company has relatively low dependence on working capital funding, even as the EPC services business remains working capital intensive. |
Outlook: Positive CRISIL Ratings believes HAL’s business risk profile will improve with reduction of redeployment risk for its vessels, supported by its established market presence in the vessel hire business and growing presence in the EPC services segment, while maintaining a healthy financial risk profile. |
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 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 70.1% stake in Seamec, with the balance held by the public. The company operates in two distinct verticals of the shipping business - offshore support vessels & services and bulk carrier charter business. |
Key Financial Indicators (CRISIL Ratings-adjusted)
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
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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Criteria Details
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