By Ankur Rustagi

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 (NCDs)

INE242A08437

22 October 2019

7.41%

22 October 2029

INR30

IND AAA/Stable

Affirmed

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,joint ventures (JVs) and associates, while arriving at the ratings owing to their operational, strategic and legal linkages with IOC. Furthermore, the agency has applied the top-down approach using its Parent and Subsidiary Rating Linkage Criteria for arriving at the ratings of IOC due to its strong legal, operational and strategic linkages with the government of India (ownership of 51.5% in 1QFY21).

KEY RATING DRIVERS

Strong Linkages with GoI: The ratings continue to reflect IOC’s strategic importance to the government of India (GoI), given the company’s role as the GoI’s extended arm for policy implementation. The importance is reaffirmed by the government’s pricing measure of increasing the excise duty on petrol and diesel, which also impacted the marketing margins of oil marketing companies (OMCs). 

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) (32% of the total domestic refining capacity), 29,085 retail outlets (43% market share) and pipeline length of over 14,600km (51% share in crude and product pipeline in length). On a standalone basis, IOC has a refining capacity of 69.2mmtpa.  

Fuel retailing in India has largely remained dominated by IOC, Bharat Petroleum Corporation Ltd and Hindustan Petroleum Corporation Limited (HPCL’, ‘IND AAA’/Stable). However, the GoI’s recent  move towards the privatisation of Bharat Petroleum Corporation could alter the market structure. Ind-Ra will assess the linkages between the GoI and OMCs post the stake sale of Bharat Petroleum Corp and any policy-level changes that accompany the sale, including the subsidy-sharing mechanism. Ind-Ra will also assess if IOC and HPCL would remain strategically important to the GoI to further its policies. 

Refinery Margins to Improve from 2HFY21: Ind-Ra expects IOC’s refining EBITDA to remain low in 1HFY21, as muted demand would result in lower gross refining margins (GRMs). Furthermore, the benchmark Singapore GRM stood at a negative USD0.9/bbl in 1QFY21. Moreover, lower capacity utilisation of refineries (4QFY20: 99.4%, FY20: 100.3%) would result in the operating costs exceeding USD2.5/bbl. Ind-Ra expects the GRMs to gradually start improving from 3QFY21, as a revival in global economic activity would lead to an improvement in the crack spread of key petroleum products such as petrol and diesel. IOC’s capacity utilisation of refineries increased to above 90% during the first three weeks of June 2020 from around 40% in April 2020, with a revival in domestic demand, resulting from the easing of lockdown restrictions. Higher margins build-up in the fuel prices owing to upgradation to BS-VI norms should also support refining margins over  the long term. Given the inventory markdown in 4QFY20, Ind-Ra expects the inventory gains to be limited in 1QFY21. 

On a standalone basis, IOC’s refining segment incurred an EBITDA loss  (including other income) of INR122 billion in FY20 (FY19: INR82 billion) on account of i) inventory losses of INR148 billion due to inventory markdown to sub-USD40/bbl, resulting from a steep decline in crude prices in 4QFY20, and ii) a decline in the core GRM, excluding inventory gain/loss, to USD2.64/bbl (FY19: USD4.81/bbl) owing to lower crack spreads in the key petroleum products. The impact of continued lower crack spreads in 1QFY21 is likely to be somewhat mitigated by the discounts received from crude suppliers and the higher-than-average crude inventory of 8mmt carried by the company. 

Petrochemical Segment EBITDA to Improve from FY22: IOC’s petrochemical segment’s standalone EBITDA (including other income) declined to INR26.8 billion in FY20 (FY19: INR51.6 billion) on account of a decline of 13% yoy in the sales volume to 2.2mmt and lower spreads of key products. A decrease in naptha prices, due to a fall in crude prices, and an improvement in the crack spread of key products, on account of a gradual revival in global demand, are likely to bolster margins in the petrochemical segment post 2HFY21. The petrochemical cycle has been subdued since FY17, when IOC had earned an EBITDA of INR76 billion. The utilisation of petrochemical plants had almost revived to pre-COVID-19 levels in June 2020. The commencement of unit –II (340 kilo tonnes per annum) of the polypropylene unit (total capacity of 680 kilo tonnes per annum) at Paradip in February 2020 would boost the petrochemical segment’s profitability over the long term. However, the intense competition and demand-supply mismatch could lead to subdued margins in FY21. Additionally, the company’s presence in multiple end-products, namely linear alkyl benzene, styrene butadiene rubber and paraxylene and purified terephthalic acid provides diversification to the product profile, thereby protecting the segment’s profitability to some extent. 

Marketing and Pipeline Segment Reduce Cash Flow Volatility: Ind-Ra expects IOC’s marketing and pipeline segment to cushion the company’s cash flows during periods of volatility in crude prices. IOC is likely to incur capex of INR105 billion in FY21 towards the marketing and pipeline segments, thereby increasing their contribution to the overall EBITDA. Moreover, during periods of low crude prices, Ind-Ra expects IOC’s marking margins to be higher than the historical run rate; despite the likely decline in volumes in FY21, IOC would be able to earn nearly INR15-INR16 billion in the marketing segment. Moreover, the investments made by the management in the automation/revamp of marketing operations could result in lower operating expenses. Additionally, IOC is looking to increase its pipeline capacity, which would ensure additional stable EBTIDA from the pipeline segment. IOC’s marketing segment’s EBITDA (including other income) on a standalone basis decreased to INR146 billion in FY20 (FY19: INR150 billion), given the marketing segment’s inventory losses of INR17.9 billion and the marginal reduction in sales volume to 89.7mmt (89.9mmt).. The company’s pipeline segment’s EBITDA (including other income) on a standalone basis declined marginally to INR61 billion in FY20 (FY19: INR63 billion) owing to a fall of 3.6% yoy in the throughput to 85.3mmt (FY19: 88.5mmt). Furthermore, the total subsidy receivables declined to INR132.7 billion in FY20 (FY19: INR190 billion) owing to a fall in the LPG under-recovery to INR12.4/kg (INR19/kg) and a decrease in kerosene quantity and under-recovery to INR6/litre (INR 15/litre). The subsidy burden is likely to fall further in FY21, aiding the company’ cash flows and reducing the borrowings. 

Credit Profile to Improve in FY21: Ind-Ra expects IOC’s consolidated credit profile to start improving from 2HFY21, primarily driven by demand revival; inventory gains, given the sharp increase in crude prices from the March 2020 lows; and higher GRMs due to the improvement in the crack spread of petrol and diesel. During FY20, IOC’s consolidated EBITDA declined to INR55.3 billion (FY19: INR352.2 billion); excluding the inventory loss of INR113 billion, which has been classified as an exceptional loss in the audited financials, the adjusted EBITDA stood at INR168.3 billion. IOC’s consolidated net leverage (net adjusted debt/adjusted EBITDA) increased to 7.6x in FY20 (FY19: 2.7x) and its gross interest coverage (adjusted EBITDA/gross interest expense) reduced to 2.6x (7.2x). The credit metrics deteriorated largely because of a decline in the standalone EBITDA, as the company incurred a high inventory loss of INR166 billion in FY20 (FY19: inventory gain of INR41.7 billion), forex losses of INR39.5 billion (INR15.0 billion) and a significant compression in the normalised GRMs, which led to a fall in the reported GRMs to USD0.08/bbl (USD5.4/bbl).The leverage increased during FY19-FY20 from the levels of 1.6x in FY18 due to lower GRMs and higher capex. This is unlike the scenario witnessed during FY13-FY14, when the leverage had increased mainly because of the large subsidy burden that OMCs had to share. 

On a consolidated basis, the debt levels increased to INR1,297.9 billion FY20 (FY19: INR967.7 billion) owing to i) an increase in the financial lease obligations by INR42.3 billion to INR77.4 billion due to the adoption of Ind-AS 116 accounting standards; ii) the continued high capex of INR321.8 billion (INR261.0 billion) towards refinery upgradation and the expansion of the marketing and pipeline network; iii) a subsidy outstanding of INR132.7 billion (INR190 billion); iv) continued high dividends of INR58 billion (INR116.8 billion); and v) investments of INR18 billion (INR37 billion) in a joint venture. As demand for petroleum products revives, the crack spreads are also likely to see an uptick, thus leading to an improvement in the EBITDA as well as the leverage.  

Liquidity Indicator - Adequate: At end-1QFY21, IOC’s standalone cash and cash equivalents stood at INR111.9 billion (FYE20: INR115.9 billion). IOC’s cash and cash equivalents on a consolidated basis increased to INR143.5 billion in FY20 (FY19: INR93.3 billion). The company had short-term working capital limits amounting to INR680.0 billion The company’s average utilisation of the working capital limits was 42% during the 12 months ended June 2020. IOC’s debt outstanding on a standalone basis reduced to INR986.7 billion at 1QFYE21, given the strong subsidy collections, an improvement in the sales volumes, and continued subdued capex spending due to lower manpower availability. Of the total consolidated debt outstanding at FYE20, around 54.5% was forex denominated. About 46% of the total outstanding debt on a consolidated basis comprises term debt with scheduled repayments of INR21 billion and INR60 billion in FY21 and FY22, respectively. Of the planned consolidated capex of INR260 billion for FY21, INR40 billion will be incurred for refining, INR60 billion for the marketing segment, INR45 billion for the pipeline segment, INR23 billion for the petrochemical segment, and INR48 billion for a few joint venture investments, including city gas distribution.

Ind-Ra believes IOC has strong financial flexibility, given its access to diversified sources of funding. IOC has not availed the Reserve Bank of India-prescribed debt moratorium. IOC also has investment in the upstream assets with 10 domestic blocks and 12 overseas blocks. During FY20, IOC took an impairment charge of INR14.3 billion on the investments in the upstream portfolio, given the sharp fall in the crude prices. 

Standalone Performance: At the standalone level, IOC’s net revenue declined 8% yoy to INR4,863 billion in FY20 (FY19: INR5,277 billion), while the adjusted EBITDA (excluding exceptional inventory loss of INR113 billion) declined 44% yoy to INR188 billion. Its net leverage deteriorated to 5.6x in FY20 (FY19: 2.5x) and gross interest coverage worsened to 3.1x (7.8x) 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

FY20

FY19

Net Revenue (INR billion)

4,843

5,281

Operating EBITDA (INR billion)

164

352

Operating EBITDA Margin (%)

3.4

6.7

Gross interest coverage (x)

2.5

7.2

Net leverage (x)

7.8

2.7

Source: IOC, Ind-Ra

 

 


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (billion)

Rating

4 October 2019

6 July 2018

27 March 2018

Issuer rating

Long-term

-

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

IND AAA/Stable

NCDs

Long-term

INR30

IND AAA/Stable

IND AAA/Stable

 

 

CP programme

Short-term

INR400

IND A1+

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.

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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. 

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Ankur Rustagi

    Senior Analyst
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    0124 6687261

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121