Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A+/Stable/CRISIL A1’ ratings on the bank facilities of Jindal Drilling and Industries Ltd (JDIL).

 

The ratings continue to reflect JDIL’s strong credit risk profile, mainly benefited by improvement in the rig charter rates. From the lows of around $25,000/day seen in fiscal 2019, charter rates have improved to around $88,000/day in the latest repricing in March 2024 for one of the company’s rigs. The charter rates are supported by high crude oil prices and improved utilisation of the available rigs in the market with no major fresh investments being undertaken in this industry. The increased accruals earned from improved charter rates has further strengthened the company’s financial risk profile, with net debt/ earnings before interest, tax, depreciation and amortisation (EBITDA) remaining healthy at 0.6 time as on March 31, 2024.              

 

The ratings continue to reflect the established business risk profile of the company in the domestic oil rigs and drilling business, with longstanding relationships maintained with upstream companies in India’s oil and gas space. Re-deployment risk for the rigs is expected to remain low, given there is a continued requirement by the Exploration and Production (E&P) players to undertake their E&P operations as these rigs are all deployed for production activities. All the five rigs owned/leased are contracted as on date.

 

Financial risk profile continues to be comfortable, driven by low gearing, adequate liquidity, and healthy debt protection metrics. The ratings also factor in support that JDIL receives, being part of the DP Jindal group. These strengths are partially offset by high exposure to group companies, as well as any downward revision in charter rates.

 

During fiscal 2021, the company had received Rs 160 crore from ONGC after an interim order of the Supreme Court (SC) over a previous dispute between ONGC and JDIL. The company received the amount after furnishing a bank guarantee to the SC. The company utilised Rs 80 crore to partially repay intercorporate loans and has retained the remaining amount as a fixed deposit. As the matter is still pending under arbitration, Rs 160 crore appears as other liability in the company’s financials. Any adverse final order in the matter may result in crystallisation of the liability and, thus, will remain a key monitorable.

 

Apart from the above dispute, there was another receivable of Rs 14 crore in dispute with ONGC, as it relates to delay in deployment of JDIL’s rig, Jindal Supreme, during 2020. In line with the decision of Outside Expert Committee (OEC) to whom the matter was referred and to conclude this matter amicably, settlement agreement has been executed with ONGC. Consequently, USD 0.982 million will be received in the first quarter of fiscal 2025 (~Rs 8 crore) as per terms of settlement agreement. Balance amount receivable from ONGC (Rs 6 crore) has been written off, resulting in increase in other expenses in the fourth quarter of fiscal 2024.

Analytical Approach

CRISIL Ratings has considered the standalone financials of JDIL. In the case of Virtue Drilling Pte Ltd (VDPL) and Discovery Drilling Pte Ltd (DDPL), CRISIL Ratings has followed the moderate consolidation approach to account for the support extended to these entities.

 

Also, CRISIL Ratings has centrally factored in the strong business and financial linkages with the DP Jindal group as JDIL is strategically important to the group.

 

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 business model: JDIL has been in the business of oil rigs and drilling for over 30 years. The company’s vast experience has helped it to establish longstanding relationships with India’s leading upstream companies. The company has been able to complete the deployments in a timely manner and secure contract renewals at relatively higher rig charter rates for the latest contract renewals. The company operates five oil rigs, all of which are deployed with ONGC. As on March 31, 2024, two of the five rigs are owned by the company. The rest are owned by group companies and are currently sub-contracted to JDIL. Company plans to acquire one more rig (Jindal Pioneer) from its group entity, DDPL.

 

• Improvement in operating performance: Revenue and operating margin augmented in fiscal 2024, benefited by improvement in rig charter rates. From the lows of around $25,000/day seen in fiscal 2019, charter rates improved to around $88,000/day in the latest repricing of contracts undertaken by ONGC in March 2024. The charter rates are supported by high crude oil prices and improved utilisation of the available rigs in the market with no major fresh investments being undertaken in the industry

 

JDIL reported Rs 619 crore of revenue for fiscal 2024, as against Rs 514 crore in fiscal 2023. Operating profitability remained steady at Rs 211 crore for fiscal 2024, from Rs 208 crore previously, supported by improvement in charter rates and steady utilisation of rigs as per the ongoing contracts. Company had foreign exchange fluctuation gains of Rs. 28 crore in fiscal 2023, which came down to Rs. 6 crore in fiscal 2024. While re-deployment risk of the rigs is expected to be low, CRISIL Ratings continues to monitor the susceptibility of charter rates (at the time of signing of contracts) to crude oil prices, which are inherently volatile.

 

• Comfortable financial risk profile: The capital structure is comfortable with gearing below 0.50 time since fiscal 2015 and was 0.25 time as on March 31, 2024. Debt protection metrics are healthy with interest coverage and net cash accrual to total debt ratios of 15.11 times and 0.60 time, respectively for fiscal 2024. Leverage, as indicated by net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio, was at 0.61 time for fiscal 2024. The credit metrics are expected to further strengthen, contributed by improved accruals earned from higher rig charter rates. The company also does not have any major debt-funded capex plans over the medium term.

 

• Support from the DP Jindal group: JDIL benefits from the managerial, financial and operational support from the DP Jindal group. The group is a leading player in the steel pipes and oil rig industries and consists of three main companies - Maharashtra Seamless Ltd (MSL), Jindal Pipes Ltd (JPL; rated ‘CRISIL A/Stable/CRISIL A1’) and JDIL. It is expected that the funding requirement of any group company will be first met out of the funds available within the group, wherein there has been a track record of JDIL receiving the required funding support from its group companies, when required.

 

Weaknesses:

• Susceptibility of charter rates to inherent volatility in crude oil prices and supply of rigs: Profitability and cash flow in the rigs business depend upon rig charter rates, which in turn, 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. While there has been an improvement in the charter rates for the recently contracted rigs, they are still below the rates of upto $120,000 per day seen in the last upcycle. Further, charter rates are also susceptible to increased supply of rigs, as was witnessed during fiscal 2018 wherein high order book to fleet levels led to several rigs coming into the supply, leading to a dip in charter rates.

 

• Exposure to group companies: About 40% of the company’s capital employed is invested in group companies (VDPL and DDPL). In addition to Rs 187 crore of equity investment, the company had also extended loans of Rs 276 crore as on March 31, 2024, to these group entities. While high exposure to group entities leads to a relatively lower return on capital employed (RoCE) for JDIL, RoCE remained healthy at 11.5% for fiscal 2024, aided by improved operating performance. With planned purchase of Jindal Pioneer and adjustment of outstanding loan balance against it, investment in group companies in the form of loans is expected to come down substantially. Further exposure to group companies will be a key monitorable.

Liquidity: Strong

JDIL maintains a comfortable liquidity position, driven by expected cash accrual of Rs 200-300 crore over the medium term, against long-term debt obligation of ~Rs 70 crore. Cash and equivalents stood at Rs 164 crore as on March 31, 2024 and working capital facilities of Rs 45 crore were modestly utilised around 32% during the 12 months ended April, 2024. Capex towards acquisition of Jindal Pioneer rig of ~Rs. 620 crore is expected to be funded largely by adjustment against loans provided to DDPL (~Rs. 250 crore), and balance through accruals and existing liquidity.

Outlook: Stable

CRISIL Ratings believes JDIL’s credit risk profile will continue to benefit from the established business model and current contracts with ONGC, which provide adequate revenue visibility over the medium term.

Rating Sensitivity factors

Upward factors

• Sustained improvement in operating performance, resulting in improvement in RoCE to 17-18% on a sustainable basis
• Further progress on unwinding of exposure towards group companies and consolidation of rigs assets under JDIL

 

Downward factors

• Delay in rig deployment or debt-funded rigs acquired, moderating financial risk profile with net debt/EBITDA exceeding 3 times on a sustainable basis
• Any significant, additional exposures towards group companies
• Weakness in the credit profile of the group or change in stance of support to JDIL

About the Company

JDIL, part of the Dharam Pal Jindal Group (DP Jindal group), is a leading Indian company in offshore drilling and allied services, including directional drilling and mud logging. JDIL takes rigs on lease from group companies or third parties and provides drilling services to upstream companies in Mumbai Offshore (Bombay High) region. The company also provides mud-logging and directional drilling services to onshore sites.

Any other information: Not applicable