Rationale

 For the [ICRA]AA(Stable)/[ICRA]A1+ ratings

 The reaffirmation of the ratings of ONGC Petro additions Limited (OPaL/the company) considers its strong parentage i.e., Oil and Natural Gas Corporation Limited {ONGC, rated [ICRA]AAA(Stable)/A1+} and GAIL (India) Limited {[ICRA]AAA(Stable)/A1+}. The Chairman of ONGC is also the Chairman of OPaL’s board. ONGC has extended additional support by subscribing to the share warrants and providing letter of comfort (LoC) for OPaL’s NCDs of up to Rs. 940.50 crore and backstopping support for the put options for the company’s compulsorily convertible debenture (CCD) programme. Further, ONGC had proposed a capital restructuring plan in September 2023 for OPaL wherein ONGC would be infusing fresh equity/unsecured loans and converting the CCDs and share warrants held by it, thereby making OPaL a subsidiary of ONGC. The proposal, however, remains subject to the approvals from the relevant government authority and ONGC's shareholders. The above transaction, if approved, is expected to be completed by the end of the Q2 FY2025 and will remain a key monitorable. Upon implementation of the capital restructuring plan, ONGC’s equity stake in OPaL would rise to around 95% and thus OPaL will become a subsidiary of ONGC. The capital restructuring is expected to reduce the outstanding debt on the books of OPaL (excluding the CCDs) and result in significant savings in interest costs, which should enable the company to reduce the level of losses being posted at the net profit level. ICRA opines that the capital restructuring is credit neutral for OPaL. ICRA, thus, expects OPaL to continue to enjoy high financial flexibility because of its parentage, evident from its ability to raise funds in the debt market at competitive rates. The ratings consider the firm operational profile of OPaL, reflected in the healthy capacity utilisation over the last couple of years, barring the major turnaround maintenance carried out in FY2023. In FY2024, the capacity utilisation of the plant has remained at around ~91%. During FY2024, the performance was adversely impacted by high gas prices and their impact on feedstock prices and power costs. Polymer prices had remained subdued during the fiscal, resulting in significant decline in tolling margins. The polymer tolling margins have weakened sharply over the course of CY2023 due to large capacity additions and a weak demand outlook amid tightening monetary policy actions by the global central banks. At present, the prices of polymers and chemicals continued to be subdued, though there has been some uptick recently. Further, in recent months there has been some improvement in the power costs with lower gas prices. The ratings continue to factor in the strong parentage of ONGC that has resulted in strong operational and financial support for OPaL on an ongoing basis. The ratings remain constrained by the weak credit profile of OPaL and the vulnerability of its cash generation to the global polymer cycle, import duty variations and foreign exchange risks. ICRA also takes note of OPaL’s plans to exit the special economic zone (SEZ), which is expected to result in cost savings and help improve the financial performance and the developments will be monitored. The ratings are, however, constrained by the company’s highly leveraged capital structure owing to the significant cost overruns in the project and the losses posted by the company since the beginning of operations, which were largely debtfunded. Given the leveraged balance sheet of the company, the overall credit profile is expected to remain subdued in the near to medium term as the outlook for the tolling margins remains weak. The ratings are also constrained by the vulnerability of OPaL’s profitability to the cyclicality inherent in the petrochemical business. The Stable outlook on the long-term rating reflects ICRA’s expectation that ONGC’s presence as the parent will continue to lend OPAL the financial flexibility to raise funds at competitive rates, despite the anticipated pressure on the latter’s cash generation, given its strategic importance to the parent.