ONGC<\/a>).<\/p>\n\u201cThe agency assesses HPCL\u2019s standalone credit profile at \u2018bb\u2019 to reflect its position as one of India\u2019s biggest oil-marketing companies, average-but-improving complexity of its refining assets and moderate financial profile,\u201d Fitch said in a statement.<\/p>\n
HPCL, it said, is highly strategic to ONGC\u2019s vertical integration strategy, and its refining capacity, along with its large fuel retail network, increases ONGC\u2019s downstream integration, making the company India\u2019s third-largest oil-refining and fuel-marketing company.<\/p>\n
The investment in HPCL is also ONGC\u2019s largest. ONGC in January 2018 paid Rs 36,915 crore to acquire 51 per cent stake in HPCL from the state. \u201cWe believe there is a high likelihood of exceptional support from ONGC to HPCL should the subsidiary face financial difficulties,\u201d it added.<\/p>\n
HPCL has about one-fourth market share of India\u2019s fuel marketing, and the second-largest number of retail fuel outlets. With its refining capacity of 27 million tonnes per annum (mtpa), including 11 mtpa of capacity in its joint venture, HPCL-Mittal Energy Ltd is set to increase it to 36 mtpa within the next 12 months, and accounts for over 10 per cent of the country\u2019s refining capacity.<\/p>\n
HPCL marketed about 19.5 million tonnes of fuel in the six months ended September 30, 2019 and refined 8.5 million tonnes. \u201cWe expect HPCL to maintain its leading position over the medium term in light of its expansion plans,\u201d it said.<\/p>\n
Fitch expected HPCL to incur around Rs 60,000 crore in capex over FY20-FY23 to expand and upgrade its refineries, while also enhancing its retail and pipeline infrastructure.<\/p>\n
\u201cWe expect these investments to improve HPCL\u2019s refining asset quality and business profile over the long term,\u201d it said. \u201cHowever, we expect the investment plans to result in negative free cash flows over the medium term, driving up leverage.\u201d<\/p>\n
HPCL\u2019s Mumbai refinery capacity will increase from 7.5 mtpa currently to 9.5 mtpa by end-January 2020, and that at the Visakhapatnam refinery will rise from 8.3 mtpa at present to 15 mtpa in July 2020.<\/p>\n
\u201cFitch expects HPCL\u2019s standalone gross refining margins (GRM) to fall to USD 3.2 a barrel in FY20 from USD 5.0 a barrel in FY19. GRMs for HPCL\u2019s refining segment fell to USD 1.9 per barrel during 1HFY20,\u201d the statement said. \u201cThis was in line with the industry due to strong new supply from China, volatility in crude prices leading to inventory losses, and unfavourable movement in the light-heavy crude spreads.\u201d<\/p>\n
However, Fitch expected the margins to gradually improve from 2HFY20, benefitting from strong diesel spreads, driven by new global marine-fuel regulations as HPCL has a higher share of middle distillates in its refining product slate that meet the requirements.<\/p>\n
Its GRMs should also benefit over the medium term from the completion of modernisation and expansion of its refineries, improving their Nelson Complexity Index to 10 from an average of around 8 currently.<\/p>\n
HPCL\u2019s standalone credit profile is one notch lower than the \u2018bb+\u2019 of both Indian Oil Corp (IOC<\/a>) and Bharat Petroleum<\/a> Corp Ltd (BPCL<\/a>).<\/p>\nIOC and BPCL are larger, have greater vertical integration and a better balance between refining and marketing volumes than HPCL, justifying the one-notch difference, although the SCPs of all three have low headroom in their financial metrics, Fitch said.<\/p>\n
![\"Fitch](\"https:\/\/images.financialexpress.com\/2020\/01\/1-120.jpg\")