January 06, 2020 Revised

Chennai Corporation Limited: Rating reaffirmed

Summary of rating action Previous Rated Amount Current Rated Amount Instrument* Rating Action (Rs. crore) (Rs. crore) Commercial Paper 6000.0 6000.0 [ICRA]A1+; reaffirmed *Instrument details are provided in Annexure-1

Rationale ICRA has taken a consolidated view of CPCL along with its parent Limited (IOCL) (rated [ICRA]A1+), which has 51.9% stake in CPCL, because of the strong business linkages, particularly with respect to imported crude oil sourcing and product off-take. ICRA is of the opinion that IOC would support CPCL to meet its financial obligations, should the need arise. CPCL remains strategically important to IOC as the latter meets its product requirements for the South Indian market from the former. The rating reflects CPCL’s strategic position within the IOC group, which result in low demand risk; its long standing track record in refining business; and the high financial flexibility with lenders by virtue of being a subsidiary of IOCL. The IOCL group has a diversified refinery base at 11 locations on a consolidated basis and its integration into marketing, pipelines and segments reduces the impact of cyclicality associated with the refining segment (which contributed ~22% of EBIDTA in FY2019). The rating reflects the consolidated entity’s dominant and strategically important position in the Indian energy sector, and its role in fulfilling the socio-economic objectives of the GoI. The rating also reflects IOC’s high financial flexibility arising from its large sovereign ownership (53.88% stakes owned by the GoI), the significant portfolio of liquid investments (~ Rs. 23,017 crore as on September 30, 2019 including GoI bonds and investments in GAIL () limited, Oil & corporation and limited (OIL)), and its ability to raise funds from the domestic/foreign banking system and capital markets at competitive rates.

The rating, however, also considers the vulnerability of the consolidated entity’s profitability to global refining margin cycle, import duty protection, and INR-USD parity levels. The consolidated entity is also exposed to project implementation risks as both IOCL and CPCL are in the midst of executing large projects that span the entire downstream value chain; however, the risk is largely mitigated by the Group’s proven track record of successfully implementing several large projects. The Group also remains subject to regulatory risks related to intervention in product pricing of sensitive products viz. PDS Kerosene and domestic LPG. Although, this risk is high in an elevated oil price scenario, the past track record of the GoI to ensure low under-recovery levels for PSU Oil Marketing Companies (OMCs) provides comfort from the credit perspective. Key rating drivers and their description Credit strengths

Strong parentage - Indian Oil Corporation Limited has the controlling stake in the company, with shareholding of 51.9%. CPCL derives significant operational benefits from being a part of the IOC group, with respect to imported crude oil sourcing and product off-take. IOC had also extended financial support to CPCL in FY2016 by subscribing to Rs. 1000.0 crore non -convertible preference shares on a private placement basis. However, during June 2018, with improvement in financial performance in the preceding two fiscal, CPCL repaid Rs. 500.0 crore of non-convertible preference share to

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IOCL. ICRA believes due to CPCL’s strategic position within the IOC group in South India, should the need arise, IOC would support CPCL to meet its financial obligations.

IOC, being the largest oil refining and marketing company in India, commands considerable economic importance. The company holds significant strategic importance for GoI as it helps to meet the socio-economic objectives of price control of sensitive products such as subsidised (LPG) and superior kerosene oil (SKO). The company is also the largest contributor to the government exchequer. Thus, the sovereign support is expected to continue. The company dominates the domestic refining sector with a share of 32.4%. The company is also the leading public oil marketing company with a ~40% market share (including private players) in FY2019. The company has the largest marketing network spanning across the country and actively undertakes multiple branding and customer loyalty initiatives. On a consolidated basis, IOC has 11 refineries (including two under CPCL) across India.

Low demand risk due to locational advantage; integrated operations of Group mitigates cyclicality risk in refining segment of consolidated entity – CPCL benefits from being the only refinery company in the IOC group in South India, which results in low demand risk. Over the last decade, IOC has implemented several pipeline projects in order to evacuate products from CPCL in a cost effective manner and to strengthen its presence in Southern Market.

IOC’s large marketing operations generate stable profits, although subject to risks related to regulatory developments and inventory gains/losses to some extent. Further, a large pipeline infrastructure owned by the company also results in stable cash generation. The forward integration of IOC into the segment provides operational synergies such as conversion of surplus products in the country such as naphtha, into higher value petrochemicals (like HDPE, PP etc), which also lead to higher margins. Overall, significant integration across segments reduces the risks related to refining operations.

Financial flexibility with lenders - Due to its long track record and group support, CPCL enjoys high financial flexibility with lenders, allowing it to avail debt at a short notice at low interest rates. IOC continues to enjoy high financial flexibility, which has enabled it to borrow from the domestic and overseas banking system and capital markets at competitive rates, to fund its large working capital requirements and for project finance. The same is supported by IOC’s strong parentage arising from the GoI’s 51.5% stake. The company’s investments in ONGC, GAIL, and Oil India with aggregate market value of ~Rs. 14,517 crore as on September 30, 2019 besides the unsold stock of GoI Special Oil bonds and GoI securities of ~Rs. 8500.0 crore as on March 31, 2019 provide considerable financial flexibility. Credit challenges

Leveraged capital structure and project implementation risks - CPCL’s financial risk profile is characterised by leveraged capital structure as the company is in the midst of a debt-funded capex cycle, which constrained the profit margins in FY2019 and H1 FY2020. CPCL’s gearing increased to 1.9x as on March 31, 2019 and 2.2x as on September 30, 2019. Further, ICRA takes note of the plans for expansion of refinery capacity of the CBR unit, which will entail significant capex, although the funding strategy is yet to be finalised and the developments on this front will be monitored.

However, the gearing of the consolidated entity stood at 0.8x as on March 31, 2019. The consolidated entity has significant capex plans spanning the entire downstream value chain with an outlay of ~Rs. 2,000 billion over next 6-7 years. The capex plans include the ongoing up-gradation of refineries for production of BS-VI compliant fuel, brownfield expansion of refineries, setting up of nearly 6,500 km of pipeline infrastructure, investments in setting up of retail infrastructure, setting up of petrochemical plants etc. Besides the company is also planning to set-up a mega refinery under a JV with other two PSU OMCs along with ADNOC and Saudi-Aramco on the west coast of India for nearly $60billion (IOC’s share of $15 billion). Any material time or cost overruns in the group projects could lead to an increase in the company’s borrowing levels and moderation of credit metrics. However, the risk is largely mitigated by the company’s proven track record of successfully implementing several large projects. 2

Vulnerability of profitability to global refining margin cycle, import duty protection, and INR-USD parity levels- CPCL has limited pricing flexibility and its margins are vulnerable to movement in international crude prices and crack spreads, import duty differentials and foreign exchange rates. This was reflected during FY2019 and H1FY2020, when the company witnessed margin contraction because of impact of forex losses, inventory losses and weak crack spreads.

Given the nature of the business, IOCL (consolidated) would remain exposed to the movement in the commodity price cycles and the volatility in the crude prices. Any adverse changes in the import duty on its products would also have an impact on the company’s domestic sales. The company’s profitability is also exposed to the forex rates (INR-US$), given the business is largely dollarised on sales, crude procurement and foreign currency loans. The performance also remains susceptible to regulatory risks, pertaining to pricing of sensitive petroleum products. However, the past track record of the GoI to ensure low under recovery levels for PSU OMCs provides comfort from the credit perspective. Any adverse change in the GoI’s policy in this regard, thereby weakening the key credit metrics of IOCL (consolidated) will be a key rating sensitivity

Liquidity position: Strong Despite weak profit margins and cash accruals in the last one year, the liquidity profile of CPCL remains strong aided by availability of unutilised working capital limits and high financial flexibility by virtue of it being a subsidiary of IOCL, which allows it to raise funds at fine rates. The company has successfully refinanced its borrowings in the past. The company has ~Rs. 900.0 crore of loan repayments falling due in FY2020 and FY2021, which are expected to be met through internal accruals and refinancing.

The parent IOCL had cash balance, including short-term investments of ~Rs. 11571 crore (including the GOI oil bonds), as on September 30, 2019. The company enjoys strong access to capital markets and high financial flexibility due to sovereign ownership. Besides, the company has investments in equity shares in ONGC, GAIL, Oil India with aggregate market value of Rs. 14,517 crore as on September 30, 2019, which also provide financial flexibility and support liquidity to the company. Rating sensitivities

Negative triggers – Downward pressure on the rating could emerge if there is any deterioration in credit profile of the parent, IOCL, or any weakening of linkages between CPCL and IOCL. Analytical approach

Analytical Approach Comments

Applicable Rating Corporate Credit Rating Methodology Methodologies Rating Methodology for Downstream Oil Companies : The ratings factor in the demonstrated support from GoI to IOC in Parent/Group Support terms of sharing the Gross Under Recoveries for LPG and SKO being borne by the GoI thus supporting the profitability of PSU OMCs. For arriving at the ratings, ICRA has considered the consolidated financials of IOCL Consolidation (including CPCL). The subsidiaries and JVs of IOCL that have been considered are enlisted in Annexure 2.

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About the company

Indian Oil Company Limited

IOC is currently the largest corporate entity in India by sales. Government of India has 51.5% equity stake in the company as on September 30, 2019. The company and its subsidiaries have a total refining capacity of 80.7 MMTPA, which is 32.4% (as on September 30, 2019) of the total domestic refining capacity. The company accounted for 39.9% of the total petroleum products sold within the country in FY2019. IOC also enjoys a dominant presence in the domestic crude and product transportation business, controlling significant share in the country’s total downstream pipeline capacity. The company has interests across the gas value chain as well, from LNG import terminals to city gas distribution networks (CGD). The company currently operates CGD networks in Agra and Lucknow through Green gas Limited (joint venture with GAIL (India) Limited); besides, the company is also implementing CGD projects in Chandigarh, Allahabad, Panipat, Daman, Ernakulam, Udhamsingh Nagar, and Dharwad through IndianOil-Adani Gas Private Limited—a JV with the .

Chennai Petroleum Corporation Limited CPCL, earlier known as Madras Refineries Limited (MRL), was established in December 1965 as a joint venture of the Government of India (GoI), Amoco Inc. of USA(Amoco), and National Iranian Oil Company (NIOC) of , with their initial equity contributions in the venture being in the ratio of 74:13:13. In 1985, Amoco divested its equity holding in favour of GoI. CPCL came out with a public issue in 1994 wherein GoI divested part of its equity stake. In 2000-01, GoI sold its stake in CPCL to IOC as part of its efforts to insulate stand-alone refineries from market volatility, following the dismantling of the Administered Pricing Mechanism (APM). As on March 31, 2019, IOC held 51.9% equity stake in CPCL, with NIOC and others holding 15.4% and 32.7%, respectively. CPCL has total installed refining capacity of 11.5 million metric tons per annum (mmtpa) spread over Manali (10.5 mmtpa), near Chennai, and Cauvery Basin (1.0 mmtpa), near Nagapattinam, both in . Being a stand-alone refinery, CPCL’s products, barring a few industrial feedstock and fuels, have always been sold by the oil marketing companies. After IOC’s acquisition of the majority stake in CPCL, bulk of the latter’s output is sold through IOC.

In FY2019, CPCL reported a net loss of Rs. 219.3 crore on an operating income of Rs. 41,338.4 crore compared to a net profit of Rs. 913.0 crore on an operating income of Rs. 32527.3 crore in the previous year. During the same period, IOCL on consolidated basis, reported a net profit of Rs. 15889.5 crore on an operating income of Rs. 528148.9 crore compared to net profit of Rs. 21715.2 crore on an operating income of Rs. 421491.8 crore in the previous year.

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Key financial indicators (audited) CPCL IOCL (Consolidated) FY2018 FY2019 FY2018 FY2019

Operating Income (Rs. crore) 32,537.30 41,338.4 4,21,491.8 5,28,148.9 PAT (Rs. crore) 913.0 -219.3 21,715.2 15,889.5 OPBDIT/OI (%) 6.6% 1.8% 9.9% 7.0% RoCE (%) 27.1% 1.4% 22.1% 15.5%

Total Outside Liabilities/Tangible 2.7 3.5 1.5 1.9 Net Worth (times) Total Debt/OPBDIT (times) 2.1 8.8 1.6 2.6 Interest Coverage (times) 6.7 1.8 10.8 7.5 DSCR 5.5 0.3 1.1 0.9

Status of non-cooperation with previous CRA: Not applicable

Any other information: None

Rating history for past three years Current Rating (FY2020) Rating History for the Past 3 Years Rating FY2019 FY2018 FY2017 Instrument Amount Amount Type Rated Outstanding 06-Jan- 20-Nov-2018 28-Sep-2017 15-Jul-2016 2020 Commercial Short 1 6000.0 - [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ [ICRA]A1+ Paper Term Long [ICRA]AAA/stable 2 NCD 1000.0 - - - - Term withdrawn Amount in Rs. crore

Complexity level of the rated instrument ICRA has classified various instruments based on their complexity as "Simple", "Complex" and "Highly Complex". The classification of instruments according to their complexity levels is available on the website www.icra.in

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Annexure-1: Instrument details Date of Amount Issuance / Coupon Maturity Rated Current Rating ISIN Instrument Name Sanction Rate Date (Rs. crore) and Outlook NA Commercial Paper NA NA 7-365 days 6000.00 [ICRA]A1+

Source: CPCL

Annexure-2: List of entities considered for consolidated analysis Company Name Ownership Consolidation Approach Chennai Petroleum Corporation Limited 51.9% Full Consolidation Indian Catalyst Private Limited 100.0% Full Consolidation IndianOil (Mauritius) Limited 100.0% Full Consolidation Lanka IOC PLC 75.1% Full Consolidation IOC Middle East FZE 100.0% Full Consolidation IOC Sweden AB 100.0% Full Consolidation IOCL (USA) Inc 100.0% Full Consolidation IndOil Global BV 100.0% Full Consolidation IOCL Singapore PTE Limited 100.0% Full Consolidation

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Corrigendum:

Document dated January 06, 2020 has been corrected with the revision as detailed below:

• On Page No. 2, under financial flexibility with lenders section, GOI’s stake in IOCL has been update; under credit challenges, in leveraged capital structure and project implementation risk section, gearing of the consolidated entity has been revised to 0.8x as on March 31, 2019 • On Page No. 3, under the liquidity section, the cash including short term investments have been revised to Rs 11571 crore as on September 30, 2019 • On Page No. 4, in key financial indicators table, TOL/TNW for IOCL (consolidated) for FY2018 has been revised to 1.5

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Analyst Contacts K Ravichandran Sai Krishna +91 44 4596 4301 +91 44 4596 4304 [email protected] [email protected]

Abhishwet Anand Dhete Prashant Vasisth +91 44 4596 4312 +91 124 4545 322 [email protected] [email protected]

Relationship Contact L. Shivakumar +91 22 6114 3406 [email protected]

MEDIA AND PUBLIC RELATIONS CONTACT

Ms. Naznin Prodhani Tel: +91 124 4545 860 [email protected]

Helpline for business queries:

+91-9354738909 (open Monday to Friday, from 9:30 am to 6 pm) [email protected]

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