ICRA upgrades outlook on Indian Oil's long term rating

Diesel price deregulation to reduce under recovery burden

Rating agency ICRA today upgraded outlook on Indian Oil Corporation’s (IOC) long term rating “AAA” from “negative” to “stable” on steady decline in gross under recovery burden.

The revision in outlook takes into account the steadily declining gross under recovery (GUR) burden on IOC owing to the partial deregulation of diesel, ICRA said in statement.

The retail price of diesel is expected to become market linked within current financial year (FY15) barring any spike in crude oil prices or steep depreciation of the rupee against US dollar.

ICRA has reaffirmed the “AAA” rating assigned IOC’s bonds and also reaffirmed “A1+” rating assigned to its commercial paper.

Following the likely deregulation of diesel, the Oil Marketing Companies (OMCs) would incur under recoveries on Kerosene (for under Public Distribution System) and Liquefied Petroleum gas (for domestic consumption). Both of these have far lower volumes vis-à-vis diesel thereby reducing the impact of a rise in crude oil prices or depreciation of rupee on gross under recoveries, it added.

ICRA said it expects the Government of India to gradually reduce fuel subsidies, through a mix of directed subsidy to the needy consumers and small price increases. This should lower the Gross Under Recoveries for the PSU OMCs to manageable levels in the medium term.

Nonetheless, any steep rise in crude oil prices due to geopolitical or other reasons and/or steep depreciation of the INR against USD leading to higher under recovery burden will be key rating sensitivities.