By Bhanu Patni

India Ratings and Research (Ind-Ra) has affirmed Indian Oil Corporation Ltd’s (IOC) Long-Term Issuer Rating at ‘IND AAA’. The Outlook is Stable. The instrument-wise rating actions are given below:

Instrument Type

ISIN

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (billion)

Rating/Outlook

Rating Action

Non-convertible debentures

INE242A07207

10 September 2008

11.0%

10 September 2018

INR10.7

IND AAA/Stable

Affirmed

Commercial paper programme

 

-

-

Up to 365 days

INR400

IND A1+

Affirmed

KEY RATING DRIVERS

Strong Linkages with GoI: The ratings continue to reflect IOC’s strong strategic and operational linkages with the government of India (GoI; Fitch Ratings Ltd. ‘BBB-’/Stable; ownership: 56.98% at end-FY18). IOC is the largest of India’s top three public sector oil refining and marketing companies (OMCs). It operates 11 refineries with a combined capacity of 80.7mmtpa, which translates into 33% of the total domestic refining capacity. The company has 27,089 retail outlets (43% market share) and pipeline capacity of 13,000km (57% share in crude and product pipeline by length). The agency expects the GoI to continue to support IOC, given its dominant role in the oil and gas sector, and the large capex being undertaken by IOC to ensure energy security implementation. Ind-Ra notes that IOC’s linkages with the GoI remain strong, despite the fuel reforms, as IOC continues to sell liquid petroleum gas and kerosene at lower than market prices, although the under-recovery has reduced. 

In accordance with Ind-Ra’s parent subsidiary criteria, the linkages could be re-assessed if there are further fuel reforms in liquid petroleum gas and kerosene. In addition, Ind-Ra would assess the ability of the OMCs to maintain pricing freedom in decontrolled products in the wake of rising crude prices.
  

Improvement in GRMs:
Gross refining margins (GRMs) for the refining segment improved to USD8.49/bbl in FY18 (FY17: USD7.77/bbl) driven by i) improved crack spreads for petrol (up USD1/bbl yoy) and diesel (up USD2.8/bbl yoy), ii) favourable inventory movement with refining segment inventory gains of INR57.7 billion in FY18 (FY17: INR89.6 billion), iii) improvement in distillate yield to 80.4% (78.8%), and iv) lower fuel and loss percentage of 8.8% (9.4%). The improved GRMs along with higher capacity utilisation of 99.7% in FY18 (FY17: 94.2%) led to an increase in the refining segment’s EBITDA to INR205.3 billion (INR132.7 billion). 

Ind-Ra expects GRMs to improve in FY19 driven by a further improvement in crack spreads on account of inventory drawdown of petrol in the US and higher demand for diesel in the shipping industry, continued inventory gains driven by higher crude prices and IOC’s landlocked refineries, and an improvement in operating metrics with an improvement in the overall capacity utilisation, driven by Paradip refinery. 

Increased Volumes in Marketing and Pipeline Segments:
IOC’s marketing volumes (excluding petrochemicals) increased to 86.22mmt in FY18 (FY17: 80.747mmt) driven by increased domestic demand for liquid petroleum gas, petrol and diesel. Higher volumes, along with an increase in marketing margin to around INR0.82/litre in FY18 (FY17: INR 0.75/litre) led to increase in the marketing segment’s EBITDA to INR82 billion (INR71 billion). The OMCs have not been able to get the benefit of input tax credit as key petroleum products do not fall under the ambit of the Goods and Services Tax, leading to under realisation in margins. 

Pipeline volumes also increased to 85.7mmt in FY18 (FY17: 82.5mmt) driven by higher products throughput with EBITDA/tonne of INR738.9 (INR742.8). 

Future Growth Drivers
: IOC has a planned capex of around INR200 billion annually over FY19-FY24 for refinery capacity expansion, meeting new emission standards and yield improvements, petrochemicals capacity expansion, improving marketing outreach and increasing its pipeline network. Further, IOC is increasing its gas business with the Ennore LNG terminal likely to be completed in October 2018 and additional regasification capacities booked at Dhamra, and Jafrabad LNG terminals apart from existing tie ups with Petronet LNG Limited at Dahej and Kochi terminals. Ind-Ra believes IOC will be able to maintain its leadership position with timely implementation of these planned projects. 

Robust Credit Metrics:
IOC’s interest coverage (operating EBITDA/gross interest expense) improved to 10.9x in FY18 (FY17: 9.1x), driven by higher EBITDA of INR416 billion (INR340 billion) and lower average cost of borrowing of 5.8% (5.9%). Although, IOC’s total borrowings increased marginally to INR657 billion in FY18 (FY17: INR633 billion), comprising of long-term loans of INR266 billion (INR300 billion) and short-term loans of INR391 billion (INR332 billion), net leverage (net debt/EBITDA) improved to 1.6x (1.9x). IOC has dollarised around 62% of the total debt as it generates a large part of its revenue in USD, and foreign currency denominated loans, lead to lower interest cost. The large capex plan is likely to result in negative free cash flows, and hence an increase in IOC’s borrowings. However, Ind Ra expects the net leverage to remain below 2.5x. The credit metrics will also continue to be dependent upon the dividend distributions which stood at INR204 billion in FY18 (FY17: INR128 billion). Ind-Ra expects the dividend pay-outs to normalise in FY19, however, any higher-than-expected dividends could push up the leverage.

Increase in Gross Under-Recovery:
The gross under-recovery for public sector OMCs on account of sale of liquefied petroleum gas and kerosene increased to INR256 billion in FY18 (FY17: INR197 billion), which was entirely borne by the GoI. For FY19, the GoI budgeted INR250 billion of subsidy; however, Ind Ra-expects subsidy burden of INR300 billion-350 billion due to the increase in crude oil prices. The additional burden is likely to be passed on to the upstream companies, with the risk of burden sharing by the downstream companies being low. However, any delay in receipt of the subsidy from the GoI could result in higher working capital borrowings. 

Decline in Petrochemical Segment EBITDA:
Petrochemical segment’s EBITDA declined to INR61 billion in FY18 (FY17: INR76 billion) driven by lower sales volume of 2.5mmt (2.7mmt), resulting from closure of paraxylene and purified terephthalic acid plant in Panipat, leading to low capacity utilisation of 67% (97%). Further, increased competition from new capacities and increase in naphtha prices impacted the margins. Ind-Ra expects the segmental profitability to remain subdued driven by higher reliquified natural gas prices and increased competition, leading to lower ability of the manufacturers to raise prices. 


RATING SENSITIVITIES

Negative: The rating could be downgraded if IOC’s operational performance deteriorates, causing its credit metrics to worsen significantly, and Ind-Ra deems IOC’s linkages with the GoI to have weakened.


COMPANY PROFILE

IOC was formed in 1964 with the merger of Indian Oil Company Limited and Indian Refineries Limited. 

FINANCIAL SUMMARY
 

Particulars

FY18

FY17

Revenue (INR billion)

4,215

3,553

EBITDA (INR billion)

416

340

EBITDA margin (%)

9.9

9.6

Gross interest coverage (x)

10.9

9.1

Net financial leverage (x)

1.6

1.9

Source: IOC, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

27 March 2018

29 February 2016

13 October 2014

Issuer rating

Long-term

-

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

Non-convertible debentures

Long-term

INR10.7

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA

Commercial paper programme

Short-term

INR400

IND A1+

IND A1+

-

-


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Bhanu Patni

    Analyst
    India Ratings and Research Pvt Ltd 601-9 Prakashdeep Building 7 Tolstoy Marg New Delhi 110001
    011 43567276

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121