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

Rating Action

Non-convertible debentures (NCDs)

INE242A07207

10 September 2008

11.0%

10 September 2018

INR10.7

WD

Withdrawn (paid in full)

Commercial paper (CP) programme

-

-

-

Up to 365 days

INR400

IND A1+

Affirmed

Analytical Approach: Ind-Ra continues to take a consolidated view of IOC and its subsidiaries, jointventures (JVs) and associates, while arriving at the ratings owing to their operational, strategic and legal linkages with IOC.
 

KEY RATING DRIVERS

Strong Linkages with GoI: The affirmation continues to reflect IOC’s strong strategic and operational linkages with the government of India (GoI; Fitch Ratings Ltd. ‘BBB-’/Stable; ownership: 52.18% at 1QFY20). 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 80.7 million metric tonnes per annum (mmtpa), which translates into 32% of the total domestic refining capacity. The company has 27,702 retail outlets (44% market share) and pipeline capacity of over 14,000km (51% 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. 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.

Further, the company continues to act as GoI’s extended arm for policy implementation, as reaffirmed in the earlier move by the GoI instructing OMCs to absorb INR1/litre towards the petrol and diesel price cut announced on 4 October 2018.

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 (LPG) and kerosene. In addition, Ind-Ra would assess the ability of the OMCs to maintain pricing freedom in decontrolled products in case of high crude prices. The linkages could also be re-assessed in case of lowering of GoI’s stake in the company, wherein Ind-Ra would assess the continuance of GoI control in IOC’s decision making and whether IOC continues to act as an extended arm for implementation of government policies.

Increase in Marketing and Pipeline Segment EBITDA
: IOC’s standalone marketing segment EBITDA increased to INR150 billion in FY19 (FY18: INR82 billion) due to higher marketing throughput of 85.1mmt (84.3mmt) and higher per litre EBITDA margin of around INR1.5 (INR0.8). IOC continued to charge higher per unit prices especially in 4QFY19, despite softening of crude prices to cover the large inventory losses incurred in 3QFY19 in refining and marketing segments. The pipeline segment EBITDA continued to report moderate growth at INR67 billion in FY19 (FY18: INR64 billion) as throughput increased to 88.5mmt (85.7mmt).

Ind-Ra expects the marketing EBITDA to moderate to INR80 billion-100 billion in FY20. However, the margins would remain vulnerable to the risk of growing competition from private players and/or subsidy sharing or fuel price caps or inadequate and untimely price hikes on deregulated products, in case of high crude oil prices.

Sound Liquidity
: At FYE19, IOC’s cash balance increased to INR9.3 billion (FYE18: INR3.2 billion). Further, as of June 2019, IOC had unutilised fund-based working capital lines of INR79 billion of the total limit of INR160 billion and undrawn revolving line of credit of INR215 billion. As of 29 July 2019, CP utilisation was to the tune of INR208 billion (FYE19: INR234 billion, FYE18: INR30 billion). The company has INR35-40 billion of repayments each in FY20 and FY21. Its net working capital (excluding subsidy receivables) remained at around 10% of the revenue over FY17-FY19; Ind-Ra expects it to remain at similar levels in the medium term. Additionally, given the high ongoing capex and dividend payments, Ind-Ra expects free cash flow to remain negative in FY20 (FY19: negative INR255 billion). However, Ind-Ra believes IOC has strong financial flexibility, given its access to diversified sources of funding and strong standing in the debt markets. IOC has a portfolio quoted investments in Oil and Natural Gas Corporation, GAIL (India) Limited (‘IND AAA’/Stable), Oil India Limited and GoI oil bonds of around INR300 billion.  

Future Growth Drivers
: IOC has planned capex of around INR250 billion annually over FY20-FY24 (FY19: INR265 billion) for refinery capacity expansion, meeting new emission standards, yield improvements, petrochemicals capacity expansion, improving marketing outreach and increasing its pipeline network. Of INR250 billion capex for FY20, 33% will be incurred for the refining segment, 29% for marketing segment, 26% for pipeline segment, 7% for petrochemicals segment, and the remaining for other segment. In the medium term, IOC is expanding in the gas business by improving its terminal capacities and pipeline infrastructure. IOC is also expanding in the city gas distribution (CGD) business, with 17 geographic areas won in ninth and 10th rounds of bidding, apart from JV investments in the segment. IOC has entered into a JV with HPCL and BPCL for setting up 2,700km LPG pipeline from Kandla to Gorakhpur, which is to be completed by FY23. Ind-Ra believes IOC will be able to maintain its leadership position with timely implementation of the planned projects.

Decline in GRMs in FY19:
During FY19, IOC’s consolidated EBITDA declined to INR352 billion (FY18: INR416 billion), largely driven by a decline in the refining segment EBITDA. IOC’s standalone gross refining margins (GRMs) declined to USD5.4/bbl in FY19 (FY18: USD8.5/bbl) and Chennai Petroleum Corporation Limited’s – subsidiary of IOC also declined to USD3.7/bbl (USD6.4/bbl). The decline in GRMs was driven by i) lower inventory gains of INR32.4 billion (INR57.7 billion) at the standalone level due to crude price variations, and ii) weaker average petrol crack spread of USD8.0/bbl (USD14.6/bbl); petrol accounts 14.5% of IOC’s product output. Additionally, higher fuel and loss due to increased average crude price (FY19: USD70.2/bbl, FY18: USD57.5/bbl) led to lower EBITDA generation in the segment. At a standalone level, IOC reported refining EBITDA of INR82.3 billion in FY19 (FY18: INR205 billion).

Benchmark Singapore GRMs remained subdued at USD2.8/bbl in 1QFY20 (FY19: USD4.9/bbl; FY18: USD 7.2/bbl), however, the same have seen an upward trend in July driven by higher crack spread for diesel. Ind-Ra expects IOC’s GRMs to improve to around USD6/bbl in FY20 because of increasing crack spread on diesel supported by the International Marine Organisation’s regulations and a stable crude price environment. The GRMs would also be supported by process improvements, refinery upgradations, increase in capacity utilisation, and lower fuel and loss. However, premium over benchmark GRM is likely to reduce as pricing differential between light and heavy crude has narrowed. As a result, even high complexity refineries are unable to earn meaningfully higher GRMs. The GRMs would also remain susceptible to petrol spreads which face risk from increased adoption of electric vehicles and use of alternatives such as compressed natural gas and liquefied natural gas. Furthermore, the GRMs would be impacted by inventory gains/losses, given 41% of IOC’s refining capacity is inland requiring 40-45 days of crude storage.

Deterioration in Credit Metrics: 
IOC’s consolidated net leverage (net adjusted debt/operating EBITDA) deteriorated to 2.7x in FY19 (FY18: 1.6x) and gross interest coverage (EBITDA/gross interest expense) to 7.2x (10.9x) driven by: i) significant ongoing capex, ii) continued high dividends and buybacks of INR161 billion (INR115 billion), iii) increase in the subsidy receivable from the government to INR190 billion (INR90 billion), and iv) lower EBITDA generation. As a result, IOC’s consolidated gross debt increased to INR968 billion in FY19 (FY18: INR656 billion), of which long-term debt stood at INR432 billion (INR265 billion) and short-term debt at INR536 billion (INR391 billion). However, with maturity of higher interest-bearing NCDs and bonds of INR21.3 billion in FY19, IOC has increased the proportion of foreign currency loans in the long-term loan portfolio to 87% in FY19 (FY18: 73%), thereby further lowering its average interest cost to 5.1% from 5.8%.

Ind-Ra expects the credit metrics to remain at current levels driven by the capex guideline of INR250 billion and a moderate improvement in the GRMs in FY20. While Ind-Ra does not expect further buy backs, dividend payout is likely to remain in line with prior year distributions. Further, Ind-Ra expects subsidy receivables to remain elevated as the current budget allocation of INR375 billion for FY20 would not be sufficient, given the total subsidy outstanding for the three OMCs stood at INR370 billion at FYE19.

Decline in Petrochemical Segment EBITDA:
 IOC’s petrochemical segment EBITDA declined to INR51 billion in FY19 (FY18: INR61 billion) despite higher sales volume of 2.6mmt (2.5mmt) owing to competition from new capacities, a 16% yoy increase in naphtha prices and a 3% yoy decline in ethylene prices due to lower downstream poly ethylene prices amid new capacity additions in the US. Ind-Ra expects petrochemical volumes to improve in FY20 on the back of the commencement of 680 kilo tonnes per annum of polypropylene unit at Paradip in February 2019. However, high competition and demand-supply mismatch could lead to subdued margins of 20%-22% (FY19: 24.4%, FY18: 33.8%). 

Standalone Performance:
At the standalone level, IOC’s net revenue increased 24% yoy to INR5,277 billion in FY19 (FY18: INR4,240 billion) while EBITDA declined to INR338 billion (INR397 billion). Its net leverage deteriorated to 2.5x in FY19 (FY18: 1.5x) and gross interest coverage to 7.8x (11.4x) due to an increase in debt and lower EBITDA.


RATING SENSITIVITIES

Negative: The rating could be downgraded if 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

FY19

FY18

Net revenue (INR billion)

5,281

4,215

Operating EBITDA (INR billion)

352

416

Operating EBITDA Margin (%)

6.7

9.9

Gross interest coverage (x)

7.2

10.9

Net leverage (x)

2.7

1.6

Source: IOC, Ind-Ra

 

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

6 July 2018

27 March 2018

29 February 2016

Issuer rating

Long-term

-

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

NCDs

Long-term

INR10.7

WD

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

CP programme

Short-term

INR400

IND A1+

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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About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Bhanu Patni

    Analyst
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    0124 6687276

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121