| SUN Petrochemicals Private Limited | ||||
| 'CRISIL AA/Stable' assigned to Non Convertible Debentures; CP 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 assigned its 'CRISIL AA/Stable' rating to the Non-Convertible Debentures of SUN Petrochemicals Private Limited (SPPL) and has reaffirmed its ‘CRISIL A1+’ rating on the commercial paper programme.
The ratings centrally factor in the strong operational set-up and management of the company, and the support of its parent, Shanghvi Finance Pvt. Ltd. (SFPL). The ratings also factor in the adequate reserves and low cost of production at its main Bhaskar oil field, and an improving financial risk profile with comfortable debt protection metrics. A significant ramp up in volumes during the nine months of fiscal 2022 improved revenues to Rs 490 crore, compared to Rs 154 crore in fiscal 2021. Operating margins also improved to around 64%, from average 52% in fiscal 2021; contributed by rise in crude oil prices. Even if prices of crude oil settle to around $60/bbl. over the medium term, operating margins to continue to remain comfortable, given their low cost of production.
These strengths are partially offset by inherent geological risks in scaling up production as well as susceptibility of the operating performance to fluctuations in crude oil prices. |
Analytical Approach CRISIL Ratings has factored in the credit risk profile of SPPL, and the strong parental support of SFPL. |
Key Rating Drivers & Detailed Description Strengths: Adequate reserves and low cost of production SPPL has ventured into the upstream Oil & Gas business, wherein it currently holds the development and production rights for 4 fields in Gujarat namely, Baola, Modhera, Hazira and the Bhaskar oilfield. The Bhaskar oilfield is the main block, wherein SPPL estimates production to peak at around 5800 bbl./day. The cost of production of this field (inclusive of taxes) is comfortable at around $20/bbl., ensuring relative competitiveness even at lower crude oil prices. SPPL also has an offtake agreement with Indian Oil Corporation Ltd., for the entire output extracted from the Bhaskar field, subject to meeting the quality requirements.
Improved operating performance SPPL significantly ramped up its production volumes over the nine months through fiscal 2022 to around 3360 bbl./day, from average 1100 bbl./day in fiscal 2021. Five new wells were drilled during these nine months with one additional well planned to be drilled by the end of this fiscal. Volume is expected to improve further, with 16 new wells to be drilled over the medium term. Revenue improved to Rs 490 crore in the first nine months of fiscal 2022, compared with Rs 154 crore in fiscal 2021. Operating margin, too, improved to around 64% from average 52% in fiscal 2021; contributed by rise in crude oil prices. Even if prices of crude oil settle to around $60/bbl. over the medium term, the operating margin will remain comfortable given the low cost of production.
Improving financial risk profile Historically, while the financial risk profile was constrained by low scale of operations and weak debt protection metrics, there has however been a sharp improvement since fiscal 2021, with ramp-up of production volumes from the Bhaskar oilfield. Cash accrual was around Rs 290 crore over the nine months through fiscal 2022 and is expected at more than Rs 400 crore over the medium term, which would be sufficient to fund capital expenditure (capex) of Rs 50-70 crore for the existing oilfield. While the company is evaluating further growth opportunities, no major impact on its financial risk profile is expected as CRISIL Rating believes that SPPL will prudently invest in newer oilfields.
Strong support from the parent, SFPL SPPL is promoted by SFPL, an investment company of Mr. Dilip Shanghvi [promoter of Sun Pharmaceutical Industries Ltd. (SPIL, 'CRISIL AAA/Stable/CRISIL A1+’)]. SFPL is expected to continue to provide the required financial and managerial support and hold a majority stake in the business. SFPL has a strong credit risk profile underpinned by its 40.3% holding in SPIL, which is worth Rs. 80,400 crore (as on February 23, 2022) vis-à-vis total debt (including guaranteed debt) of approx. Rs 1700 crore.
Weaknesses: Exposed to geological risks in terms of ramping up of production volumes While reserves are proven, SPPL remains exposed to geological risks given it needs to drill additional wells to ramp up production volume. The company plans to drill 16 more wells over the medium term in order to ramp up production from current levels of about 3300 bbl./day. Timely drilling of additional wells and ramp-up in production will be key monitorables.
Susceptibility to fluctuations in realisations and foreign exchange (forex) rates Realisations of the output extracted are benchmarked to the Bonny Light Oil price index (with a 4.5% discount), quoted in dollars. Accordingly, any adverse movement in either the oil prices or forex rates could have a direct impact on the operating profitability of SPPL, as revenue would then get affected without any corresponding decline in production cost. Hence, SPPL proactively hedges its forex risks to protect its overall performance. |
Liquidity: Strong SPPL is expected to generate annual accruals of around Rs. 350-450 crore in fiscals 2022 and 2023, to further improve with an increase in output expectations. These accruals would be sufficient to fund the capex plans of the existing oilfield. Term loan of Rs 160 crore would be repaid in fiscal 2022, funded through a mix of internal accruals and debt refinancing. The company continues to enjoy strong financial flexibility, supported by the parental support of SFPL. |
Outlook: Stable SPPL’s credit risk profile is expected to remain stable over the medium term, supported by improved output realisations from the existing oilfield. While the company is exploring further growth opportunities, CRISIL Ratings believes it will exercise prudence in its implementations, phasing and funding. |
Rating Sensitivity Factors Upward factors
Downward Factors
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About the Company Incorporated in 1995, SPPL is a privately held company owned by the promoters of SPIL. Investment in SPPL is undertaken through their investment company SFPL, which also owns a 40.30% stake in SPIL.
SPPL was initially in the business of manufacturing acetylene carbon black from acetylene gas, to be used in battery manufacturing and other niche applications. Since 2014, the company has ventured into the upstream Oil & Gas business, wherein it currently holds the development and production rights for 4 fields in Gujarat namely, Baola, Modhera, Hazira and the Bhaskar oilfield.
For the nine months ended December 31, 2021, SPPL recorded profit after tax (PAT) of Rs 203 crore on revenues of Rs 490 crore, against a PAT of Rs 6 crore on revenue of Rs 86 crore for the corresponding period of the previous fiscal. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Not yet placed |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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