ICRA revises IOC's ratings to stable on falling under-recoveries

Credit rating agency ICRA said it has revised the outlook for Indian Oil Corporation (IOC), India's largest petroleum refiner, from negative to stable on the back of gradually falling under-recoveries.

Improved credit ratings indicate low possibility of debt default by a firm and impact interest rates charged by its lenders.The revision in outlook takes into account the steadily declining gross under recovery (GUR) burden on IOC owing to the partial deregulation of diesel. The retail price of the fuel is expected to become market linked within the current fiscal subject to a spike in crude oil prices or steep depreciation of the rupee against the dollar.

"Following the likely deregulation of diesel, the Oil Marketing Companies (OMCs) would incur under recoveries on kerosene and LPG both of which have far lower volumes against diesel there by reducing the impact of arise in crude oil prices or rupee depreciation," ICRA said in a statement.

The agency expects the government to gradually reduce fuel subsidies through a mix of directed subsidy to the needy consumers and small price increases.The ratings revision also reflects IOC's "high financial flexibility arising from its large sovereign ownership, large portfolio of liquid investments and ability to raise funds at competitive rates".

OMCs' gross under-recoveries stood at Rs 1,39,900 crore in 2013-14 as against Rs 1,61,000 crore in the previous year. Post the partial deregulation of diesel initiated in January 2013, the OMCs have been increasing diesel prices by Rs 0.5 per liter every month. ICRA said complete diesel deregulation could occur within the current fiscal provided crude price and the value of the rupee remainsstable. "ICRA expects the total under-recoveries of OMCs to be around Rs 1,00,000 crore for 2014-15 at the average rupee-dollar exchange rate of 60 and average crude oil price of US $108 per barrel factoring in Rs 0.5 per liter increase in diesel prices on a monthly basis."

While the government provides budgetary support to OMCs by transfer of cash, the support from upstream companies is in the form of discounts in the price of crude oil or products purchased from them. Cash compensation from the government is, however, received with delays due to which OMCs have to resort to short-term borrowings which impact their capital structure. With the reduction in gross under recoveries, IOC's short term borrowings or working capital borrowings have reduced both in absolute terms and as a proportion of the total debt.

Its short term borrowings, as aproportion of total debt, reduced from 69 per cent in March last year to 56 per cent as on March 31, 2014. IOC has a current refining capacity of 65 Million Tonne Per Annum (MTPA) - roughly a third of the country's total capacity. The company plans to spend Rs 56,200 crore by 2017 on upgrading existing refineries, completion of 15 MTPA new refinery at Paradip in Odisha, multiple pipeline projects and exploration & production activities.According to ICRA, two factors would determine the business risk profile for IOC -- timely completion of new projects without significant cost overruns and a likely surplus forecasted globally for refined and petrochemical products in the medium term.