TEXT-Fitch Publishes Bharat Petroleum Corporation's 'BBB-' Rating; Outlook Negative

(The following was released by the rating agency)

SINGAPORE, October 12 (Fitch) Fitch Ratings has publishedIndia's Bharat Petroleum Corporation Limited's (BPCL)'BBB-'Foreign Currency Long-Term Issuer Default Rating withNegative Outlook. The agency has also assigned BPCL a seniorunsecured rating of 'BBB-' and an expected rating of 'BBB-(EXP)'to its senior unsecured USD notes.

The final rating on the notes is contingent on the receiptof final documents conforming to information already received.BPCL's rating is equalised with that of its 54.9% owner, thestate of India ('BBB- '/Negative), to reflect their strongoperational and strategic ties.

The Negative Outlook on BPCL's IDR reflects that of India.Fitch views BPCL as one of government of India's (GoI)socio-economic policy tools through its provision of essentialfuels at affordable prices. GoI's policy has been to set pricesfor certain refined oil products - diesel, liquefied petroleumgas (for domestic use) and kerosene (sold through the publicdistribution system) - at levels that are lower than marketprices, which lead to under-recoveries for BPCL. However, GoIhas ensured that downstream public sector companies' (PSCsincluding BPCL) annual net under-recoveries are kept undercontrol through direct budgetary support and by directingupstream PSCs to supply feedstock at a discount.

The rating also reflects BPCL's position as one of thethree public sector oil refining and marketing companies inIndia (the other two being Indian Oil Corporation (IOC, 'BBB-'/Negative) and Hindustan Petroleum Corporation Limited), and thethree PSCs' dominant position in the national oil industry.

Despite the differences in the scale of the three IndianPSC downstream companies - IOC accounts for 46% of India'spetroleum marketing against BPCL's 22% - the GoI has exhibited asimilar level of support to all three entities. GoI does notprioritise or discriminate between the three entities in termsof the support extended. The state of India holds majority stakein all these entities and exercises significant management andpolicy control. BPCL has low operating profitability due to thenet under recoveries and the cost of funding liquidity gapsarising from late receipt of state subsidies.

BPCL's significant capex to increase refinery capacity andoperational efficiency has resulted in negative free cash flowsin the last five years to FY12 with the exception of FY11. Givenits further capex plans and continued net under recoveries, FCFis likely to be negative in the medium term. However, Fitchassesses that BPCL can maintain adequate liquidity due to cashand cash equivalents on hand of INR78.3bn at FYE12 and its goodaccess to banks given its position as an important PSC.


Negative: Future developments that may, individually orcollectively, lead to negative rating action include: - aperceived weakening of BPCL's linkages with the state of India -change in India's ratings

Positive: Any positive rating action on India will resultin a similar change to BPCL's ratings, provided the ratinglinkages remain intact.

BPCL operates two refineries in Mumbai and Kochi with acapacity of 12mmtpa and 9.5mmtpa, respectively. BPCL holds a61.65% stake in Numaligarh Refinery Ltd (3mmtpa) and a 50% stakein recently commissioned Bharat Oman Refinery Ltd (6mmtpa). BPCLhas also acquired minority stakes in 28 Exploration &Productionblocks (including 17 overseas). For FY12, consolidated revenuewas INR2,119bn and operating profit was INR48.1bn.