HMEL's credit metrics to worsen due to weak refining margins: Fitch Ratings

New Delhi, Feb 28 () Fitch Ratings on Friday said HPCL-Mittal Energy Limited's credit metrics over 2019-20 and 2020-21 financial years would worsen by more than previously expected due to near-term weakness in refining margins and a faster pace of its petrochemical (petchem) capex.

Earlier this week, Moody's Investors Service downgraded the corporate family rating of HMEL to Ba2 from Ba1 due to weak refining margins arising from a slump in fuel demand.

In a statement, Fitch Ratings said while credit metrics will worsen in the current and the next financial year, "an accelerated earnings contribution from petchem will lead to faster deleveraging, resulting in net leverage (as defined by adjusted net debt/operating EBITDAR) coming down to below 5-times by FY23."

The net leverage is still within Fitch's negative rating sensitivities for HMEL's Standalone Credit Profile (SCP) of 'bb-'.

HMEL expects to start commercial operations of its petchem project by April 2021, a year ahead of its previous expectation. It spent R 3,800 crore during the first nine months of current fiscal and is likely to top Rs 6,000 crore for the financial year, compared with Fitch's previous expectations of Rs 3,500 crore.

The company, which operates an 11.3 million tonnes a year oil refinery at Bhatinda in Punjab, is in the process of setting up a dual-feed petrochemical capacity of 1.2 million metrics tons per annum (mtpa).

The project, which commenced in October 2017, was originally planned to be completed by March 2022. However, the company now intends to complete it by April 2021.

The firm, which is an equal joint venture of Hindustan Petroleum Corp Ltd (HPCL) and steel czar Lakshmi N Mittal's Mittal Energy Investments, expects FY22 to be the first full year of petchem operations, with an EBITDA contribution of around USD 400-500 million.

"However, we have assumed that it takes longer for the petchem project to stabilise and turn profitable, contributing around USD 115 million of EBITDA in FY22," it said.

Fitch expects net leverage to peak at around 7x over FY20-FY21, before improving to below 5x in FY22 and below 4x in FY23.

The leverage spike in FY21 is also affected by a one-off 60-day shutdown period for major maintenance of the refinery and integration of the petchem operations.

"We had earlier expected leverage to range around 6x during FY20-FY21 and fall to around 5x by FY23," it said.

HMEL reported EBITDA of Rs 2,600 crore during April-December 2019, with a gross refining margin (GRM) of USD 9.6 per barrel versus USD 10.3 in FY19.

The reduction was in line with the industry due to strong new supply from China, volatility in crude prices leading to inventory losses, and falling heavy-fuel oil cracks in light of the tougher marine fuel regulations by the International Maritime Organization IMO from January 2020.

Fitch said it has revised down its industry-wide GRM expectations, given the continuing surplus in the refining markets and also weaker-than-expected diesel spreads.

The refining margins are also likely to be weighed down by the coronavirus situation in the near term but refining margins are expected to improve over the medium term, benefitting from strong diesel spreads driven by the IMO regulations, it said.

"Sustained volatility in GRMs, lower earnings from the petchem project, or weaker demand for petroleum products if COVID-19 prevails for a prolonged period would be credit negative.

"Any delays or challenges in the integration of HMEL's petchem project could also have an impact on deleveraging and add downward pressure to HMEL's SCP, which has little headroom at 'bb-'," Fitch added.

Bhatinda refinery has high-complexity with a Nelson complexity index of 12.6, allowing for the processing of heavy crude oil and optimisation of product slate. ANZ ANZ MRMR
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