Moody's upgrades BPCL outlook to 'stable' as govt calls off stake sale

Rating agency Moody's has upgraded the outlook on rating Bharat Petroleum Corporation Limited (BPCL) from 'negative' to 'stable' as the government's decision to call off the proposed stake sale in the company eliminates the risk of potential deterioration in its credit quality.

"If the divestment had occurred, we would have reassessed the sovereign support currently incorporated in BPCL's rating that results in a one-notch uplift," said Sweta Patodia, assistance and vice president and analyst, Moody's. On May 26, 2022, the government called off the process for the strategic divestment of its 52.98 per cent stake in the company.

The rating agency affirmed BPCL's Baa3 issuer rating reflecting its position as the second-largest state-owned refining and marketing company in India.

The company's credit metrics will recover over the next 12-18 months such that they will be more appropriately positioned for its current rating, it said

The cancelation of the intended stake sale also alleviates concerns around the refinancing of BPCL's dollar-denominated bonds, which could have become payable within 45 days if the government's stake had been reduced below 51 per cent.

The reduction in the government's shareholding below 51 per cent is also an event of default under the terms of the bonds and could have led to an acceleration of payment under the bonds.

Moody's expects BPCL's operating performance to remain weak so long as its net realized prices for gasoline and gas oil are lower than international market prices.

Even though the Singapore benchmark refining margins have remained buoyant, BPCL, along with the other oil marketing companies (OMCs) in India, has not been able to reap the benefits of the high margins. This is because the increase in net realized prices of transportation fuel for the OMCs has been slower than the

increase in international prices, it said.

Moody's believes that the government will eventually allow downstream companies to adjust selling prices, but such price increases will be implemented gradually.

Consequently, BPCL's EBITDA to decline to around Rs 8,000-8,500 crore for the fiscal year ending 31 March 2023 (fiscal 2023) before recovering in fiscal 2024. For fiscal 2022, Moody's estimates BPCL's EBITDA, excluding inventory gains, to be around Rs 14,200 crore.