HPCL- Mittal Energy NCD programme rated at 'Fitch AA-(ind)'

These debentures are secured in nature with a 4% coupon rate and a significant premium on maturity. The proceeds of the issue shall be used to prepay a part of the existing rupee term loans thus preventing interest outgo and easing liquidity pressures during initial years of commercial operations.

HMEL's ratings reflect the credit strength of its sponsors (Hindustan Petroleum Corporation Limited (HPCL, 'Fitch AAA(ind)'/ Stable) and Mittal Energy Investment Pte Ltd (MEIL)). The ratings are underpinned by HMEL's support agreement with the sponsors to maintain a minimum shareholding of 51% until the term loans are fully repaid and to fund project cost overruns as of end-March 2012. HMEL is also entitled to receive various fiscal and non-fiscal benefits from the government of Punjab by virtue of its refinery being located in the state. The ratings also benefit from the high refinery complexity of 12.6 on Nelson Complexity Index, which would enable HMEL to command high refining margins.

The ratings have been notched up to reflect the existence of HMEL's firm 'take-or-pay' product off-take agreement with HPCL for the evacuation of produced liquids (about 80% of the total production) and the former's strong operational linkages with, and strategic importance to, the latter. Fitch notes that HMEL's liquid output is fulfilling the refined products requirements of HPCL's distribution network in the northern India, increasing the latter's downstream integration. Also, HMEL enjoys significant freight advantages for its refinery compared with the refineries located in the western India, as both its production facility and end-markets would be located in northern India.

HMEL also has long-term agreements with various other industrial users and cement manufacturers for the supply of polypropylene and pet-coke, which also form a significant part of its solids product slate. However, volatile gross refinery margins along with operational challenges in ramping up the production at its recently commissioned refinery could impact its profitability and debt servicing capability. Moreover, the projected overcapacity in polypropylene would expose the company to over-supply risks and pricing pressures in this product segment.

WHAT COULD TRIGGER A RATING ACTION?

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

• a failure to ramp-up operations as planned leading to delayed deleveraging
• any weakening of HMEL's linkages with the sponsors
• a significant deterioration in HPCL's credit profile

HMEL is a JV between HPCL and MEIL, each with a 49% stake; the rest 2% is held by Industrial Finance Corporation of India (1.2%) and State Bank of India (0.8%). The JV was formed to set up a 9 million metric tonnes per annum greenfield petroleum refinery in Punjab, which was successfully commissioned in September 2011. HMEL's wholly owned subsidiary, HPCL-Mittal Pipelines Limited ('Fitch AA-(ind)'/Stable), has set up a dedicated crude oil receipt and storage facility in Gujarat and a 1,017 km cross-country pipeline for the transportation of crude oil to HMEL's refinery.

HMEL's outstanding ratings (including the above) are as follows:

• National Long-Term Rating: 'Fitch AA-(ind)'/Stable
• INR80.98bn term loans: National Long-Term Fitch AA-(ind)'
• INR30bn fund-based working capital limits: National Long-Term 'Fitch AA-(ind)' and National Short-Term 'Fitch A1+(ind)'
• INR20bn non-fund-based working capital limits: National Long-Term 'Fitch AA-(ind)' and National Short-Term 'Fitch A1+(ind)'
• INR15bn commercial paper programme (within fund-based working capital limits): National Short-Term 'Fitch A1+(ind)'
• INR5bn NCD programme: National Long-Term 'Fitch AA-(ind)'
• INR15bn NCD programme: National Long-Term 'Fitch AA-(ind)'