Fitch reaffirms Bharat Petroleum's ratings with stable outlook

Mumbai: Fitch Ratings Wednesday reaffirmed Bharat Petroleum Corporation's long-term forex issuer default rating and that of its outstanding senior unsecured debt at 'BBB-' with a stable outlook.

Fitch cited strong linkage of the second-largest oil marketer with the state as the primary reason for its stance. The government holds 54.9 percent in the company.

Fitch believes that the linkages remain strong despite the deregulation of diesel prices in 2014 and introduction of the direct benefit transfer scheme.

The agency, however, cautioned that it can relook at the ratings subject to the government's commitment to maintaining market-based prices for already-deregulated products as and when oil prices rise. Lower oil prices and deregulation of diesel have improved BPCL's finances significantly, it noted.

The oil reforms since September 2014, along with low crude oil prices, have resulted in zero subsidy for BPCL for the year to March 2016, against Rs 490 crore in the previous fiscal.

"We expect no subsidy burden over the next two years, given our assumptions of oil prices at USD 42 a barrel in 2016 and USD 45 in 2017. Furthermore, the government hiked the subsidised LPG prices by Rs 1.98 in July and Rs 1.93 in August of 2016. Similarly, the government increased kerosene prices by Rs 0.25 a litre in July 2016," the report said.

BPCL is the third-largest refiner with a capacity of 30.5 million tonne per annum, representing 13 percent of national refining capacity and the second-largest marketer of petroleum products, with around a quarter of market share.

BPCL marketed 36.8 mt of petroleum products last year, up from 35 mt previous year and refined 29.8 mt in the year as against 29.3 mt a year ago.

"We expect BPCL to maintain its leading position over the medium to long term, given its capex plans for enhancing capacity," the report said.

On its financial position, the report expects BPCL's net leverage to remain below 3 times and Ebidta interest cover above 4.5 times over the next three years. This is despite the large capex and investment. Credit metrics improved with net leverage of 1.3 times in 2015-16 against 1.7 times in 2014-15 supported by strong gross refining margins of USD 6.59 a barrel, which is almost double than USD 3.62 in 2014-15.

But the agency expects GRMs to moderate over the next two years in line with the industry, which coupled with large investments is likely to result in a marginal weakening of credit metrics in the next two years.

It expects the benefits from Kochi refinery expansion and continuing strong performance of the Bina refinery to support improvement in operational cash flows from the next year.

BPCL has a capex plan of over Rs 60,000 crore over the coming five years.