Rationale

 The assigned rating reflects Nayara Energy Limited’s (NEL) strategically important position in the refining and marketing business in the Indian energy sector and its strong operational efficiencies. NEL has consistently operated at high utilisation levels with crude throughput above nameplate capacity of 20.0 million metric tonnes per annum (MMTPA), barring the fiscals where planned shutdown was undertaken for refinery maintenance. NEL accounts for 8% of India’s total refining capacity and 7% of the total retail outlets in the country as of April 2024. The rating also considers the high complexity of the company’s refinery in Vadinar (Gujarat), with a Nelson Complexity Index (NCI) of 11.8, enabling the refinery to process low-cost heavy/ultra-heavy crude oil grades, leading to healthy gross refining margin (GRM) that has been consistently higher than the industry average. However, NEL's GRM premium over the regional benchmark, by virtue of its advantageous higher discount feedstock sourcing, is likely to taper off in line with international trends, and its overall refining margins will moderate from the highs of FY2023 and FY2024. The rating also considers the strategic coastal location of the refinery, which helps the company save on freight costs for crude oil imports as well as petroleum product exports. The company further benefits from the presence of a captive oil terminal and a 1,010 Mwe captive power plant, providing it with cost advantages. ICRA, however, notes that the company’s profitability would remain vulnerable to the import duty differential, commodity price cycles and forex movements. Nonetheless, the company has a board-approved hedging policy, which largely alleviates the risk associated with pricing and currency movements. The company’s operations are also exposed to asset concentration risk due to being a single-location refinery, although the company has insurance policies to cover business interruptions and property damages. Also, its loss-free track record due to robust operational practices offers comfort. Further, the company’s debt protection metrics are likely to moderate from the levels of 9M FY2024. The healthy GRM over the past two years, reduced NEL’s working capital requirements, allowing it to steadily reduce its gross borrowings thereby improving debt coverage indicators. NEL plans to commission a 450,000 MTPA petrochemical plant in H1 FY2025, which will result in downstream integration and revenue diversification, apart from providing a boost to the cash flow. Further, in FY2025 and FY2026, NEL has capex plans towards maintenance capex, completion of petrochemical projects, ethanol plants, additional depots and catalyst replacement among others. Any material time or cost overruns in these projects could increase the company’s borrowing levels and moderate the credit metrics. ICRA notes that one of NEL’s ultimate shareholders, PJSC Rosneft Oil Company (Rosneft), holding a 49.13% stake, is under sanctions imposed by the US Treasury and the European Union since 2014. The other 49.13% shareholder, Kesani Enterprises Company Ltd (Kesani), is not under sanctions, but it has pledged its shares to Bank VTB, PJSC, which is under sanctions. At present, these sanctions do not apply to NEL. The rating incorporates ICRA’s assumption that NEL will not be subjected to the current or future sanctions imposed on its shareholders. Further, given the presence of significant minority shareholders (24.5% indirect ownership each in NEL, through Kesani, by Hara Capital S.a.r.l. and UCP PE Investments Limited, each of which is non-sanctioned), NEL’s rating will not be constrained by the weaker credit profile of the sanctioned Russian shareholder. However, a scenario of extension of sanctions to NEL or significant shareholder distributions which leads to a material deterioration in its credit metrics and liquidity will be a credit negative and a rating sensitivity.