Fitch affirms Bharat Petroleum at BBB-minus with negative outlook

Singapore, September 9 : Fitch Ratings has affirmed Bharat Petroleum Corporation Ltd's (BPCL's) long-term foreign-currency issuer default rating at BBB-minus with a negative outlook.
The agency has also affirmed BPCL's senior unsecured rating and the ratings on its outstanding senior unsecured debt at BBB-minus. Fitch has also affirmed the rating on subsidiary BPRL International Singapore Pte Ltd's US dollar guaranteed notes at BBB-minus.
Fitch said the negative outlook reflects that on the Indian sovereign.
"Our rating case incorporates weak petroleum product demand and gross refining margins in the near term followed by a gradual recovery and strong marketing margins, reflecting BPCL's ability to reap some benefits from low oil prices in its marketing segment, without a full cost pass-through to consumers."
However, said Fitch, the improvement is subject to risks of weak industry conditions persisting beyond our baseline scenario or capex or shareholder returns that are higher-than-expected which limits the headroom for its bb-plus standalone credit profile.
"We continue to treat the potential divestment of BPCL by the Indian state as an event risk as there is little information about bidders, valuation, and the potential transaction structure, especially as BPCL owns assets across many verticals and bidders may not be interested in all of them."
The deadline of September 30 for the submission of expressions of interest has been extended thrice since the initial announcement in November 2019. The slow progress has been due to a near halt in international travel to India and a generally cautious investment approach by most entities in current market conditions, in our view.
Fitch said it will monitor developments and consider suitable rating action if the sale progresses.
The government intends to sell BPCL's 61.7 per cent owned subsidiary Numaligarh Refinery Ltd (NRL) to another state-owned enterprise as part of BPCL's divestment process.
NRL has negligible debt although the refinery contributes 6 to 8 per cent of BPCL's throughput and generates better gross revenue margins than BPCL's other refineries given its higher complexity and tax benefits, contributing 18 per cent of BPCL's EBITDA.
The valuation at which NRL is sold will determine the credit impact on BPCL, should NRL's sale proceeds be used to reduce debt at BPCL. However, BPCL's credit metrics could slightly weaken if it pays out NRL's sale proceeds as dividends, said Fitch.