| Extensive experience of the management in the oil exploration & production (E&P) segment
SPPL is a Vadodara based company promoted by Shanghvi Finance Private Limited which is the promoter of Sun Pharmaceutical Industries Limited (SPIL) – one of the largest Global Specialty Generic Company. Initially, SPPL was into manufacturing of acetylene carbon black. From 2014, the company entered upstream Oil & Gas business and has closed its other segments. SPPL acquired management personnel with extensive experience in the oil E&P industry. SPPL’s oil E&P operations are headed by Mr. Padam Singh – President, a post-graduate in Chemical Engineering from IIT – Roorkee with over four decades of experience in ONGC, Reliance and GSPC. He is supported by second tier management with experience over three decades from companies such as ONGC and Reliance. Acuité believes that SPPL will derive benefits from its management with extensive experience in the oil E&P segment.
Strong financial flexibility and resource mobilization ability of the promoters
SPPL is a business venture of the promoters of Sun Pharma and is held through SFPL (investment arm of the promoter group which hold ~40.3% of SPIL’s equity, aggregating to ~Rs.1,49,000 Cr. in market value). Further, SFPL holds ~67% in SPPL as on December 31, 2023. SPIL has been declaring dividend in a range of 100 per cent to 350 per cent over the last five years. There have been significant dividend inflows from SPIL in FY22 and FY23, which is accretive to the group’s financial flexibility. Further, SFPL does not has any outstanding debt as on March 31, 2023. SPPL's bank facilities were earlier backed by corporate guarantee issued by SFPL, which has been withdrawn for bank facilities of Kotak Mahindra Bank and is under process for withdrawal of Axis bank facilities. However, there remains an implicit support from SFPL in form of unsecured loans and equity infusions. SFPL’s financial flexibility is derived from the value of its unencumbered shares in SPIL viz-a-viz its borrowings and other contingent exposures. However, SFPL’s obligations to other Group entities in the Group will restrict the support available to some extent.
Acuité believes that SFPL will continue to generate a robust cash flow from its investments in SPIL and will maintain its debt levels at prudent levels (within the covenants agreed upon with the lenders). Since the revenue flows of SFPL is highly dependent on SPIL’s performance and dividend policy, the financial performance and position of SPIL will be a key credit monitorable.
Augmentation in business risk profile; adequate offtake agreement
SPPL has reported significant improvement in its operating performance in FY23 as reflected by revenues of Rs. 1316.18 Cr. registering a growth of 132% from Rs. 566.76 Cr. in FY22. In the current fiscal, the revenues stood at Rs.1074 Cr. in 9MFY24 reflecting an YoY growth of ~10% compared against same period in the last year. Acuité estimates the revenues to remain in the range of Rs.1400-1600 Cr. in FY24. The improvement was on account of increase in oil prices across the globe and higher daily oil production, which in turn is a result of stabilization of operations from Bhaskar-1 field. The growth is majorly driven by improve in average daily production of oil that stands ~6,000 bbls/day currently and the management plans to expand the same to ~7,000-7500 bbls/day. SPPL has signed an agreement in July 2020 with Indian Oil Corporation for offtake of its oil which is benchmarked to the Bonny Light oil index (with a discount). SPPL’s operating margins continue to remain healthy at 65.83% in FY23 and 68.34% in 9MFY2024 as against 69.56% in FY22. The company’s oil extracting operating costs remained low in the range of ~20-30 USD per barrel. Thus, any further increase in oil prices going forward is expected to improve SPPL's operating performance. Acuité expects SPPL's ability to maintain its scale of operations along with profitability will be a key rating sensitivity. Acuite notes that the company has invested Rs. 1105.77 crore in three partnership entities/LLPs of the group. While the management plans to divest the said stake in these entities in the near to medium term, the returns on these investments and any further investments thereof would be a key monitorable.
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