Fitch Ratings has upgraded India-based HPCL-Mittal Energy Limited's (HMEL) National Long-Term rating to 'Fitch AA-(ind)' from 'Fitch A+(ind)'. The Outlook is Stable. A list of additional rating actions is provided below.
The upgrade reflects the timely completion of HMEL's, 9 MMTPA greenfield refinery without any significant cost over runs. The crude distillation and allied units along with the power plant were commissioned in September 2011; and the refinery has started commercial sales. HMEL has earlier replaced a part of its original rupee loans of Rs. 77.9bn with external commercial borrowings. In October 2011, the entire rupee component of the borrowings was refinanced by the company, at which time the estimated project cost was Rs. 142.9bn. This has resulted in lower interest costs to the tune of Rs. 1.4bn besides incorporating a step-up repayment mechanism. Fitch notes that this would likely ease pressure on HMEL's cash flows during initial years.
The ratings reflect sponsor strength, underpinned by a support agreement to maintain a minimum shareholding of 51% until the term loans are fully repaid and to provide financial support for project cost overruns as estimated on end-March 2012. The refinery is also entitled to receive various fiscal and non-fiscal benefits from the Government of Punjab. The ratings also benefit from the high refinery complexity of 12.6 on Nelson Complexity Index, which would enable it to command higher refining margins.
The ratings have been notched up due to HMEL's firm 'take-or-pay' product off-take agreement with one of its sponsors - Hindustan Petroleum Corporation Limited (HPCL, 'Fitch AAA'/Stable) - for the evacuation of liquid production (about 80% of the total production), and the former's strong operational linkage with and strategic importance to the latter. Fitch notes that HMEL's liquid output will fulfill the refined products requirements of HPCL's distribution network in the northern India, increasing the latter's downstream integration. HMEL expects significant freight advantages for its refinery compared with the refineries located in the western India.
HMEL has also entered into agreements with various other industrial users and cement manufacturers for supply of polypropylene and pet-coke, which also form a significant part of its solids product slate. However, it would still remain exposed to the volatile gross refinery margins which could impact its profitability and debt servicing capability. Besides, the company will be exposed to operational challenges of ramping up the production of the current facility as planned. Moreover, the projected overcapacity in polypropylene would expose the company to the over-supply risks and pricing pressures in this product segment.
Negative rating action may result from a failure to ramp-up operations as planned leading to delayed de-leveraging. Moreover, any weakening of linkages with the sponsors or significant deterioration in HPCL's credit profile could impact the ratings negatively. While consolidated financial leverage (net debt/EBIDTA) of below 3x over the medium term could act as positive rating factor.
HMEL is a JV between HPCL and Mittal Energy Investment Pte Ltd, each with a 49% stake; the rest 2% is held by Industrial Finance Corporation of India (1.2%) and State Bank of India (0.8%). HMEL's wholly owned subsidiary, HPCL-Mittal Pipelines Limited - has set up a dedicated crude receipt and storage facility in Gujarat and a 1,017 km cross-country pipeline for transportation of crude oil to HMEL's refinery.
Rating actions on HMEL's facilities:
- Rs. 80.98bn term loans (enhanced from Rs. 77.93bn): upgraded to 'Fitch AA-(ind)' from 'Fitch A+(ind)'
- Rs. 30bn fund-based working capital limits: assigned at 'Fitch AA-(ind)'/'Fitch A1+(ind)'
- Rs. 20bn non-fund based working capital limits: assigned at 'Fitch AA-(ind)'/'Fitch A1+(ind)'
- Rs. 15bn commercial paper programme (within fund-based working capital limits): assigned at 'Fitch A1+(ind)'