Moody's: Credit metrics of Indian state-owned oil marketing companies to stay weak

Moody's Investors Service says that the credit metrics of the three Indian government-owned oil refining & marketing companies Indian Oil Corporation Ltd (IOCL, Baa3 positive), Bharat Petroleum Corporation Limited (BPCL, Baa3 positive) and Hindustan Petroleum Corporation Ltd. (Baa3 positive) will stay weak at least over the next 12 months.

"These companies' large dividend payments and high capital spending levels will keep their credit metrics weak, particularly in relation to retained cash flow on debt," says Vikas Halan, a Moody's Vice President and Senior Credit Officer.

Moody's report explains that the dividends paid by the three companies including distribution tax for the fiscal year ended March 2017 (fiscal 2017) increased to INR237 billion from INR85 billion the year before.

The higher dividend payments were part of the overall trend in which the contributions from the oil & gas sector, to the government of India, has been increasing. The sector contributed 23.5% of the central government of India's revenue receipts in fiscal 2017 including indirect taxes collected from consumers compared to 15.6% in fiscal 2015.

The increased dividend payments, combined with the companies' elevated capital spending levels and acquisition of upstream assets, have weakened their credit metrics in fiscal 2017 to below the rating tolerance levels for their standalone credit profiles.

"We expect that the dividend payments by oil companies will fall in fiscal 2018, based on the government's expectation of lower dividends in its budget for the current fiscal year," adds Halan. "Even then, that level of dividends is more than double the total paid in fiscal 2016."

The capital spending levels for the three companies, however, will stay high over the next few years, with their combined capital spending for fiscal 2018 totaling some INR350 billion, up about 15% year-over-year, and excluding acquisitions.

While the companies' combined cash flow from operations in fiscal 2018 will prove insufficient for their capital spending and dividend payments, and the shortfall of about INR50-INR75 billion will be funded by borrowings, Moody's expects that the three companies' credit metrics will improve for fiscal 2018, owing to higher sales volumes, improving margins and lower dividend payments.

Moody's also points out that the companies' ratings incorporate a high level of support from the Indian government (Baa3 positive). Such support can mitigate a moderate weakening of their standalone credit quality.

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