Fitch Affirms Indian Oil Corporation at 'BBB-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Indian Oil Corporation Ltd's (IOC) Long-Term Foreign-Currency Issuer Default Rating (IDR), its senior unsecured rating and ratings on its outstanding senior unsecured debt at 'BBB-'. The Outlook is Stable.
KEY RATING DRIVERS
Strong Linkages with State: Fitch equalises IOC's rating with that of its largest shareholder, the state of India (BBB-/Stable) due to their strong operational and strategic linkages. The state of India holds 58.6% in IOC. Fitch believes the linkages remain strong despite the deregulation of diesel prices in 2014. IOC continues to retail kerosene at government-prescribed prices that are lower than market prices. The government covers IOC's under-recoveries (the difference between market prices and state-controlled selling prices) from the sale of kerosene through subsidies and discounts from upstream companies while downstream companies bear part of the under-recoveries. Apart from the deregulation of diesel prices in 2014, the state has also moved to a direct benefit transfer scheme, which transfers subsidies directly to the consumers, for household liquefied petroleum gas.
Fitch may reassess the linkage of IOC with the state, as per Fitch's Parent and Subsidiary Linkage methodology, if the state oil marketing companies' policy role weakens due to further deregulation of petroleum products. While assessing the linkages, Fitch will also consider the government's commitment to maintaining market-based prices for already deregulated products when oil prices increase. The lower oil prices and deregulation of diesel have significantly improved IOC's finances. Fitch assesses the company's standalone credit profile at 'BB+'.
Dominant Market Position: IOC is the largest oil refining company in India with 80.7mtpa of capacity (35% of India's refining capacity). It operates 11 of the 23 refineries in the country. IOC's market share increased to 35% at end-March 2016 from 31% with the commissioning of its Paradip refinery in February 2016. IOC is also the largest seller of petroleum products in India, with over 46% market share of retail outlets.
Diesel Deregulation, Weak Prices: The low oil prices and deregulated diesel prices have resulted in lower net under-recoveries in the financial year ended 31 March 2016 (FY16). IOC's net under-recoveries fell to INR2.1bn in April-December 2015 from INR11.9bn a year earlier. This and the decrease in inventories are likely to result in lower working capital levels and lower debt for FY16. Debt at IOC fell to INR491bn as at end- 2015 from INR585bn a year ago.
High Capex and Investments: Fitch expects IOC's capex to remain high to upgrade refineries to meet new emission standards that will be implemented by 2020 and to expand refining and petrochemical capacity, including the expansions currently underway. Fitch expects capex and investments in upstream assets to be around INR250bn per year, over the next five to seven years.
IOC is also likely to invest in Rosneft's Taas Yuriakh fields in Russia. IOC is making the investment jointly with Oil India Ltd (BBB-/Stable) and Bharat Petro Resources Limited, a 100% subsidiary of Bharat Petroleum Corporation Limited (BBB-/Stable) for a 29.9% stake in the fields. The consortium is also evaluating an investment for a 23.9% stake in Rosneft's Vankor oil and gas field in Russia.
Financial Profile to Remain Moderate: Fitch expects IOC's financial profile to remain moderate over the medium term due to its high capex and investment plans. We expect IOC's leverage (net adjusted debt/ EBITDAR) to improve to below 3x levels in FY16 (FY15: 4.9x) and remain around 3x over the medium-term. The improvement in IOC's net leverage during FY16 is largely driven by lower debt due to a reduction in working capital and higher gross refining margin.
Strong Liquidity: IOC's strong liquidity is reflected in its large cash and equivalents of INR147bn (including oil bonds of INR120bn) as at end-December 2015. In addition the company holds shares in listed companies with market value of around INR225bn as of end-FY15. IOC also enjoys ready access to domestic and international capital and banking markets.
Fitch's key assumptions within our rating case for the issuer include:
- Higher gross refining margin in FY17 and FY18 due to the commissioning of the more complex Paradip refinery in February 2016
- Capex of around INR150bn and investment in upstream Russian assets in FY17
- Under-recoveries remain stable in FY17 at around the FY16 levels.
- Oil prices in line with Fitch's base case price deck as outlined in the Fitch's "Oil Price Assumption for Fitch Corporate Analysis Lowered Again to USD35 for 2016", dated 24 February 2016
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
-An upgrade of the sovereign rating, provided the rating linkages with the state remain intact.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- A downgrade of the sovereign rating
- Weakening of linkages between IOC and the state
For the sovereign rating of India, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 7 December 2015.
The main factors that individually or collectively could lead to positive rating action are:
- Fiscal consolidation or fiscal reforms that would cause the general government debt burden to fall more rapidly than expected in the medium term
- An improved business environment resulting from implemented reforms and persistently contained inflation, which would support higher investment and real GDP growth.
The main factors that individually or collectively could lead to negative rating action are:
- Deviation from the fiscal consolidation path, causing the already high public debt burden to deviate further from the median, or greater-than-expected deterioration in the banking sector's asset quality that would prompt large-scale financial support from the sovereign
- Loose macroeconomic policy settings that cause a return of persistently high inflation levels and a widening current account deficit, which would increase the risk of external funding stress
FULL LIST OF RATING ACTIONS
Indian Oil Corporation Limited
- Long-Term Foreign-Currency Issuer Default Rating affirmed at 'BBB-'
- Senior unsecured rating affirmed at 'BBB-'
- Senior unsecured SGD400m 4.1% notes due 15 October 2022 affirmed at 'BBB-'
- Senior unsecured USD500m 5.625% notes due 2 August 2021 affirmed at 'BBB-'
- Senior unsecured USD500m 5.75% notes 1 August 2023 affirmed at 'BBB-'