OREANDA-NEWS. Fitch Ratings has affirmed India-based Bharat Petroleum Corporation Limited's (BPCL) Long-Term Foreign-Currency Issuer Default Rating (IDR), its senior unsecured rating, and ratings on its outstanding senior unsecured debt at 'BBB-'. The Outlook is Stable.

KEY RATING DRIVERS
Strong Government Linkage: BPCL has close linkages - operationally and strategically - with its 54.9% shareholder, the Indian state (BBB-/Stable). The rating is equalised with that of India, based on Fitch's Parent and Subsidiary Linkage criteria. The linkages remain steady despite deregulation of diesel prices in October 2014. In our view, the state-owned downstream oil refining and marketing companies continue to remain important policy tools of the state, and will be used for meeting its socio economic objectives when required.

Fall in Working-Capital Needs: BPCL's working-capital requirements fell sharply in the year ended March 2015 (FY15), with INR130bn released as working-capital changes. The main reason for the fall was lower inventory costs (INR174bn, versus INR232bn at FYE14), due to lower crude oil prices. The diesel deregulation also resulted in lower subsidy requirements. Gross under-recoveries (URs, the loss between the international prices and the regulated prices of certain petroleum products) fell to INR161bn from INR345bn in FY14. This led to a reduction in the government subsidy outstanding to BPCL to INR59bn at end-March 2015 from INR106bn a year earlier.

Significant Player: BPCL is the third-largest refiner in the country, with a capacity of 30.5 million tonnes per annum (mtpa) that accounted for 14% of India's capacity, and the second-largest marketer of petroleum products with around a 20% market share. BPCL marketed 34.95mtpa in FY15 (FY14: 34.31mtpa), and refined 29.27mtpa (FY14: 28.69mtpa) of petroleum products. Revenue was INR2,370bn (FY14: INR2578bn), EBITDA INR98bn (INR94bn) and net profit INR48bn (INR39bn).

Revenue was INR519bn in 1QFY16, EBITDA INR38bn, and net profit INR24bn. The gross refining margin (GRM) for the period was USD8.55 per barrel, much higher than historical levels in the range of USD3.5-4.5 per barrel. Fitch believes that the Q1FY16 GRMs are not likely to be sustained, as they are on account of exceptionally high product margins due to maintenance shut-down by some refineries and one-off inventory gains.

High Capex: BPCL has outlined fairly high capex of more than INR400bn over the next four years. The largest portion is for the expansion of the Kochi refinery to 15.5mtpa from the current 9.5mtpa, at a cost of around INR165bn. The high capex is likely to lead to continued negative FCF over the period.

Upstream Discoveries: BPCL has 17 upstream blocks (seven in India and 10 abroad), from which it has some successful discoveries. The most notable is its 10% participating interest in the Rovuma Basin in Mozambique, wherein more than 75 trillion cubic feet of natural gas resources has been discovered. This project also plans to set up a natural gas liquefaction plant with two trains, with an initial capacity of 6mtpa each. The other noteworthy discoveries are in its Brazilian assets (20% participating interest), and West Australian onshore assets in Perth (27.8% stake).

Comfortable Financial Profile: BPCL had cash and cash equivalents of INR85bn at end-March 2015 (end March 2014: INR69bn) and also enjoys access to both international and domestic capital markets. Net leverage (net debt/EBITDA) had improved to 1.7x by FYE15 (FYE14: 2.8x), and interest cover to 7.9x (FY14: 4.8x). Fitch expects strong cash flow (FY15 FFO: INR74bn). The inventory costs - and subsequently debt - will increase with a rise in crude oil prices, which is Fitch's base case - and reflected in the agency's oil & gas price deck. We expect net leverage to rise to around 3x over the next three years.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
- GRMs are likely to remain in line with the past
- Oil prices in line with Fitch's base case price deck as outlined in the "Fitch Oil and Gas Assumptions Summary", dated 11 February 2015
- Capex will be around INR400bn over the next four years
- URs will decline in FY16, and the corresponding budgetary support will also come down significantly

RATING SENSITIVITIES

BPCL's ratings are equalised with those of India.

Positive: Developments that may, individually or collectively, lead to positive rating action include:
-An upgrade of the sovereign rating, provided the rating linkages with the state remain intact.

Negative: Developments that may, individually or collectively, lead to negative rating action include:
- A downgrade of the sovereign rating
- Weakening of linkages between BPCL and the state.

For India's sovereign rating, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 9 April 2015.

The main factors that individually or collectively could lead to positive rating action are:

- Fiscal consolidation or fiscal reforms that would cause the general government debt burden to fall more rapidly than expected
- An improved business environment resulting from implemented reforms and structurally lower inflation levels, which would support higher investment and real GDP growth.

The main factors that individually or collectively could lead to negative rating action are:

- Deviation from the fiscal consolidation path, leading to persistence of the high public debt burden, or greater-than-expected deterioration in the banking sector's asset quality that would prompt large-scale financial support from the sovereign
- Loose macroeconomic policy settings that cause a return of persistently high inflation levels and a widening current account deficit, which would increase the risk of external funding stress.