Fitch Ratings on Monday said it expects gross refining margins of state-run Hindustan Petroleum Corp Ltd (HPCL) to fall by one-third during the current fiscal due to volatility in crude prices which could lead to inventory losses.
“Fitch expects HPCL’s standalone gross refining margins (GRM) to fall to $3.2 a barrel in FY20 from $5.0 a barrel in FY19. GRMs for HPCL’s refining segment fell to $1.9 per barrel during 1HFY20," the statement said, adding that this was in line with the industry due to strong new supply from China, volatility in crude prices leading to inventory losses, and unfavorable movement in the light-heavy crude spreads.
However, Fitch expects the GRMs to gradually improve from 2HFY20, benefiting from strong diesel spreads, driven by new global marine-fuel regulations.
Its GRMs should also benefit over the medium term from the completion of modernization and expansion of its refineries, improving its Nelson Complexity Index to 10 from an average of around 8 currently.
In a note affirming HPCL’s rating ‘BBB-‘ with stable outlook, Fitch said, "HPCL is highly strategic to ONGC's vertical integration strategy, and HPCL's refining capacity, along with its large fuel retail network, increases ONGC's downstream integration, making the company India's (BBB-/Stable) third-largest oil-refining and fuel-marketing company."
Fitch added it believes there is a high likelihood of exceptional support from ONGC to HPCL should the subsidiary face financial difficulties.
In January 2018, ONGC acquired the government's 51% stake in HPCL paying ₹36,915 crore.
Fitch expects HPCL to incur around ₹60,000 crore in capex over FY20-FY23 to expand and upgrade its refineries, while also enhancing its retail and pipeline infrastructure.
HPCL’s 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.
HPCL controls one-fourth market share of India’s fuel marketing and operates the second-largest number of fuel retail 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% of the country’s refining capacity.
HPCL marketed about 19.5 million tonnes of fuel in the six months ended 30 September 2019, and refined 8.5 million tonnes. “We expect HPCL to maintain its leading position over the medium term in light of its expansion plans," it said.
“We expect these investments to improve HPCL’s refining asset quality and business profile over the long term," it said. “However, we expect the investment plans to result in negative free cash flows over the medium term, driving up leverage."
While the BSE oil and gas index fell 2.22% today, HPCL's scrip fell 7.24% to close at ₹244.70 on the BSE today.