Rationale

ICRA has taken a consolidated view of Chennai Petroleum Corporation Limited (CPCL/ the company), along with its parent Indian Oil Corporation Limited (IOCL) (rated ICRA]AAA(Stable)/[ICRA]A1+), as both the entities have strong business links, particularly pertaining to imported crude oil sourcing and product off-take. IOCL has 51.9% stake in CPCL. ICRA is of the opinion that IOC would support CPCL to meet the latter's 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 the 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 petrochemicals 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 Government of India (GoI). The rating also reflects IOC's high financial flexibility by virtue of its large sovereign ownership (51.5% stakes owned by the GoI), the significant portfolio of liquid investments (~ Rs. 20,940 crore as on March 31, 2020 including GoI bonds and investments in GAIL (India) limited, Oil & Natural Gas corporation and Oil India 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 executing large projects that span the entire downstream value chain; however, the risk is significantly mitigated by the Group's proven track record of successfully implementing several large projects. The gross refining margins (GRMs) of CPCL (standalone) had weakened considerably in FY2020 as steep crude oil price decline in Q4FY2020 resulted in high inventory losses. The GRM of the consolidated entity is also expected to be adversely impacted in FY2020. The consolidated GRMs are expected to be adversely impacted in FY2021 as well because of low capacity utilisation of refineries and weak crack spreads, as the Covid-19 pandemic suppresses global economic activity. While, at present, the capacity utilisation of refineries remains subdued, with easing of the lockdown restrictions, the economic activity is expected to pick up and the refinery operations of the consolidated entity are expected to witness improvement. The Group also remains subject to regulatory risks related to intervention in product pricing as PDS Kerosene and domestic LPG are sensitive products. Although, this risk is high in a high oil price scenario, the track record of the GoI to ensure low under-recovery levels for PSU Oil Marketing Companies (OMCs) provides comfort from the credit perspective. Any adverse change in the GoI's policy in this regard that weakens key credit metrics of the consolidated entity will be a key rating sensitivity The stable outlook on the [ICRA]AAA rating reflects ICRA's opinion that IOCL group (including CPCL) will continue to benefit from its dominant position in the domestic energy sector and its strategic importance to the GOI. comfort from the credit perspective. Any adverse change in the GoI's policy in this regard that weakens key credit metrics of the consolidated entity will be a key rating sensitivity The stable outlook on the [ICRA]AAA rating reflects ICRA's opinion that IOCL group (including CPCL) will continue to benefit from its dominant position in the domestic energy sector and its strategic importance to the GOI.