Fitch Ratings expects state-owned Indian Oil Corp’s (IOC) net debt levels to increase due to its large capital expenditure and investment plans in the medium term and affirmed a rating equivalent to India’s sovereign rating.
The ‘BBB-‘ rating with stable outlook “equalises the India-based company’s rating with that of its largest shareholder, the State of India (BBB-/Stable), based on Fitch’s Government-Related Entities (GRE) Rating Criteria,” the rating agency said in a statement.
Fitch expects IOC’s capex to remain high to upgrade refineries to meet new emission standards (BS-VI) and to expand refining and petrochemical capacity, including the expansions currently underway. Fitch forecasts average capex of Rs 25,000-30,000 crore per annum over the next five to six years, it said.
IOC’s financial profile, it said, is likely to remain moderate over the medium term due to its high capex and investment plans. Its financial profile has improved over the last couple of years with net leverage (net adjusted debt/operating EBITDAR) falling to 2.0x in the year ended March 2018 (FY18) from 2.7x in FY16 (FY17: 2.1x), mainly on account of higher gross refining margins (GRMs).
“We expect IOC’s net debt levels to increase due to its large capex plans in the medium term. However, we believe IOC’s credit metrics will remain comfortable with net leverage of around 2.5x over the next two to three years, provided its dividend outflow normalises from the high levels of the last two years,” it said.
Fitch said it has assessed IOC’s standalone profile at ‘BB+’ to reflect its dominant market position as the largest oil refining and marketing company (OMC) in India, the average-but-improving complexity of its refining assets and a moderate financial profile.
“High capex requirements are likely to keep free cash flows negative over the next few years,” it said adding up assesses IOC’s status, ownership and control by the sovereign as ‘strong’.
Fitch assesses the socio-political implications of a default by IOC as ‘very strong’. A default would significantly affect the country’s energy security given IOC’s position as the largest OMC.
IOC, along with two other state-owned OMCs, imports a large share of crude oil – a default would jeopardise their ability to do so, resulting in disruptions to the economy, the statement said.
Fitch sees the financial implications of an IOC default as ‘strong’ as it is one of the key state-owned borrowers in India and a financial default may have a strong impact on the availability and cost of financing options for the state and other GREs, it said.