'Risks to Indian oil marketing companies as government seeks more returns'

COIMBATORE: Indian state-owned

oil marketing companies

' (OMCs) financial profiles may be at risk in the near to medium term by pressure from the government to increase shareholder returns, Fitch Ratings has said.


Indian Oil Corporation (IOC, BBB-/Stable), Bharat Petroleum Corporation (BPCL, BBB-/Stable) and upstream entity Oil India (OIL, BBB-/ Stable) declared high interim dividends of 67.5% to 110% of the face value of their shares, and undertook share buybacks in the financial year ended March 31, 2019 (FY19).

“These were likely to have been driven by pressure from the Indian government (BBB-/Stable) to increase shareholder returns to shore up the weak fiscal position and finance promises made ahead of elections in April and May 2019,” Fitch stated.

“The higher shareholder returns will put more pressure on the financial profiles of the companies, which have large investment plans for the next two years,” it said. IOC and BPCL are in the process of upgrading and expanding their refineries and improving downstream integration in petrochemicals.

OIL plans to augment its domestic production and reserves. “In addition, BPCL and OIL are likely to invest in an upcoming Mozambique LNG project after a final investment decision on the project, which we expect to be made in 2H 19 ((second half of 2019),” the agency said.

“OIL has limited headroom in its current standalone credit profile of 'bbb-', which may be revised down if weakening of its financial profile results in net leverage (adjusted net debt/operating EBITDAR) exceeding 2.5 times,” it said. “However, in such an event, OIL will benefit from one notch of support from the state, resulting in the final rating remaining unchanged at 'BBB-',” Fitch said.

“IOC and BPCL have more headroom in their 'bb+' standalone credit profiles and are likely to remain resilient even in case of any modest weakening in their financial profiles,” it said. “The OMCs additionally face the risk of government intervention in fuel prices during the elections,” the agency stated.

However, Fitch does not foresee any significant impact on OMCs' financial profiles on account of fuel price controls. “We expect the OMCs to make up the losses in the subsequent period during the year in such an event.”

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