Press Release Nayara Energy Limited August 11, 2020 Ratings Facilities Amount Rating1 Rating Action (Rs. crore) Long term Bank Facilities – 12,956.14 CARE AA; Stable Term Loans/ECB/EPBG (Double A; Reaffirmed Long term Bank Facilities – 2,000.00 Outlook: Stable) Fund-based limits Short-term Bank Facilities – 2,250.00 Bill Discounting CARE A1+ Reaffirmed Short-term Bank Facilities – (A One Plus) 12,200.00 Non-fund based limits 29,406.14 (Rs. Twenty Nine thousand Four Total Facilities hundred Six crore and Fourteen lakh only) Provisional 267.00 CARE AA; Stable Non-Convertible Debentures (Rs. Two hundred and Sixty Seven crore Assigned (Provisional Double A; only) Outlook: Stable) Details of instruments/facilities in Annexure-1 Detailed Rationale & Key Rating Drivers The rating assigned to the proposed NCD of Rs.267 crore is provisional and will be converted into a final rating post completion of merger of Vadinar Oil Terminal Limited (VOTL; rated CARE AA; Stable) with Nayara Energy Limited and receipt of documents related to the same. These NCDs will be issued to minority shareholders of VOTL as a consideration. The ratings assigned to the bank facilities and long-term debt instruments of Nayara Energy Limited (Nayara, formerly known as Essar Oil Limited) derives strengths from strong market position of its shareholders i.e. Rosneft Singapore Pte Limited, a subsidiary of Rosneft Oil Company and Kesani Enterprises Company Limited, a consortium comprising Trafigura and United Capital Partners (UCP) investment group, together having 49.13% shareholding each and their continuous support to Nayara whether in sourcing of crude, offtake of products or in export prepayments; Nayara’s flexibility in sourcing of crude, its strong operational profile being India’s second largest single location refinery, relatively higher Gross Refining Margins (GRMs) due to higher complexity of refinery, continuous 100% refinery throughput since commencement (except where company had planned shutdown) and strategic location of its refinery along with captive port terminal and power plant albeit a single asset facility. The ratings also positively factors in growth in retail operations as well as its inventory hedging policy which negates the volatility in crude prices. The aforementioned rating strengths are tempered by moderate capital structure and debt credit metrics, vulnerability of profits to volatility of crack spreads which have shown weakness since FY19 and would continue to remain weak for some time, foreign exchange rates, weakness in refining margins, competitive industry scenario and government regulation risk in the Indian Oil & Gas segment. The outbreak of COVID-19 has led to decline in demand for petroleum products across the country impacting the operations of refineries in Q1FY21. Although the demand has improved with easing of restrictions from June 2020 onwards, the overall situation related to COVID 19 is evolving and remains to be seen. Rating Sensitivities Positive factors Increase in profitability on a consistent basis with recovery in GRMs, thereby improving the debt coverage indicators Improvement in overall gearing on a net debt level basis below unity on a sustained basis Negative factors Further decline in profitability on account of decline in GRMs below USD 6 to 6.5/ bbl due to weak refining margin environment. Deterioration in capital structure or net debt to EBIDTA on account of increase of overall debt or sensible weakening of operating performance 1Complete definitions of the ratings assigned are available at www.careratings.com and in other 1 CARE Ratings Limited Press Release Detailed description of the key rating drivers Key Rating Strengths Strong market position of consortium shareholders Nayara’s shareholders comprise Rosneft Singapore Pte Limited and Kesani Enterprises Company Limited, a consortium led by Trafigura and United Capital Partners (UCP) together holding 49.13% share each. Rosneft is the leader of Russia’s petroleum industry and one of the world’s largest public oil and gas companies in terms of reserves and production of the liquid hydrocarbons. Rosneft Oil Company is focused on exploration and appraisal of hydrocarbon fields, production of oil, gas and gas condensate, offshore field development projects, feedstock processing, sales of oil, gas and refined products in the territory of Russia and abroad. The Company is included in the list of Russia's strategic companies. Rosneft is the leader in the Russian oil refining sector, owning 13 major refineries in key regions of Russia and ownership stakes in a number of refineries outside Russia, as well as wide range of retail sites in 66 regions of Russia, Abkhazia, Belarus and Kirghizia. Trafigura is one of the largest physical commodities trading groups in the world with total revenue of US$171.5 billion and total assets of US$54.2 billion in the financial year 2019. Trafigura delivers commodities from one location or customer to another using its global network and infrastructure. It maintains a global presence with offices in countries across Europe, Asia, Australia, North America, Latin America and Africa. The UCP investment group is one of the largest financial investment groups in Russia. It was established in 2006 to manage assets of its partners and co-investors. UCP has accumulated a wealth of investment experience while simultaneously proving the reliability and effectiveness of its investment strategies in turbulent market environments. Assets under management currently exceed US$3 billion. The shareholders, both Rosneft and Trafigura have extended their support to Nayara for procurement of crude, exports of refined products. The shareholders have also supported in improving its capital structure by providing long and mid-term export prepayments backed by offtake contracts at optimal market cost. These prepayments have led to improvement in Nayara’s liquidity position and working capital. Strong operating profile Nayara’s refinery has one of the highest complexities across refineries in India, a Nelson Complexity Index (NCI) of 11.8. Due to high complexity of refinery, Nayara is easily able to process heavier grades of crude oil resulting in higher margins when compared with low complexity refineries. The company during past three years has processed around 64% of ultra-heavy, 30% of heavy and remaining light crude. The refinery has a capacity of 20 MMTPA which constitutes around 8% of India’s refining capacity. It can process crude oil with a blend of 15-60 API (API/American Petroleum Institute gravity is a measure of how heavy or light petroleum liquid is compared with water). Since its commencement, the refinery has consistently achieved a crude throughput more than its rated capacity of 20 MMT, except in the years where company had planned shutdown. The company has reported lower GRMs in FY20 due to weakness in crack spreads. GRM reported during FY20 was $6.5/ bbl reduced from $7.6/bbl in FY19. The company remains exposed to concentration risk, being a single location refinery, however, the strong operational track record and adequate insurance policies mitigate the risk to a large extent. Advantageous location along with captive port terminal and power plant Nayara Energy refinery is located at Vadinar, Gujarat, which is strategically located to cater the demand of domestic and export markets. Port facilities: VOTL (subsidiary of Nayara Energy) operates a captive all weather port with a natural 32 meter draft (deepest in India allowing 365 day intake) and Single Buoy Mooring (SBM) with crude oil intake capacity of 27 mmtpa. SBM is capable of handling crude Very Large Crude Carriers (VLCC), is located in the Gulf of Kutch which also houses SBMs of Indian Oil Corporation, RIL, etc., forming gateway to about 70% of total crude imports by India. The port is equipped with 2 Jetties capable of handling vessels up to size of 100,000 deadweight tonnage for total product off-take of 14 mmtpa. Power Plant: Nayara Energy operates a captive power plant within refinery premises which is equipped with oil, gas, liquid and coal fired boilers and turbines capable of generating a total of 1010 MWe of co-generative thermal power. The company only utilizes its coal based 510 MWe unit to power its refinery and keeps remaining units as backup. Growth in retail operations Nayara also has a presence in retailing of oil with more than 5,750 operational retail outlets as on June 30, 2020. The company is also building and hiring depots to store its own products for increasing supply chain efficiency, reducing logistic costs and its dependency on PSUs. Owing to outlets being operated primarily through Dealer Owned and Dealer Operated (DODO) model, the capex requirement of the company is minimal. The company has generated retail margin of around Rs.2,000 crore during FY20. Retail margin for Q1FY21 was healthy at around Rs.1,200 crore. The margins were higher as the retail prices in the country did not decline in proportion to the decline in crude prices. The margins have however bounced back to normal levels at present. 2 CARE Ratings Limited Press Release Key Rating Weaknesses Moderate capital structure and debt coverage indicators Overall gearing (excluding cash flow hedge reserve which is part of other comprehensive income) improved from 1.61x as on March 31, 2019 to 1.45x as on March 31, 2020 on account of higher profits generated during the year. Interest coverage also slightly improved to 2.29x from 2.17x in FY19, on account of higher absolute PBILDT generated during the year. Total debt to gross cash accruals also improved and declined to 10.28 years from 11.03 years in FY19, however it is still higher. Exposure to volatility of crude prices, crack spreads and foreign exchange rates The oil prices and crack spreads are a function of many dynamic markets and fundamental factors such as global demand- supply dynamics, geo-political stability in countries with oil reserves, OPEC policies, exchange rates, etc.