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 published India's Bharat Petroleum Corporation Limited's (BPCL) 'BBB-'Foreign Currency Long-Term Issuer Default Rating with Negative Outlook. The agency has also assigned BPCL a senior unsecured 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 receipt of final documents conforming to information already received. BPCL's rating is equalised with that of its 54.9% owner, the state of India ('BBB- '/Negative), to reflect their strong operational 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 essential fuels at affordable prices. GoI's policy has been to set prices for certain refined oil products - diesel, liquefied petroleum gas (for domestic use) and kerosene (sold through the public distribution system) - at levels that are lower than market prices, which lead to under-recoveries for BPCL. However, GoI has ensured that downstream public sector companies' (PSCs including BPCL) annual net under-recoveries are kept under control through direct budgetary support and by directing upstream PSCs to supply feedstock at a discount.

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

Despite the differences in the scale of the three Indian PSC downstream companies - IOC accounts for 46% of India's petroleum marketing against BPCL's 22% - the GoI has exhibited a similar level of support to all three entities. GoI does not prioritise or discriminate between the three entities in terms of the support extended. The state of India holds majority stake in all these entities and exercises significant management and policy control. BPCL has low operating profitability due to the net under recoveries and the cost of funding liquidity gaps arising from late receipt of state subsidies.

BPCL's significant capex to increase refinery capacity and operational efficiency has resulted in negative free cash flows in the last five years to FY12 with the exception of FY11. Given its further capex plans and continued net under recoveries, FCF is likely to be negative in the medium term. However, Fitch assesses that BPCL can maintain adequate liquidity due to cash and cash equivalents on hand of INR78.3bn at FYE12 and its good access to banks given its position as an important PSC.


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

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

BPCL operates two refineries in Mumbai and Kochi with a capacity of 12mmtpa and 9.5mmtpa, respectively. BPCL holds a 61.65% stake in Numaligarh Refinery Ltd (3mmtpa) and a 50% stake in recently commissioned Bharat Oman Refinery Ltd (6mmtpa). BPCL has also acquired minority stakes in 28 Exploration &Production blocks (including 17 overseas). For FY12, consolidated revenue was INR2,119bn and operating profit was INR48.1bn.