High capex may boost Indian Oil's debt: Fitch

US agency Fitch Ratings on Monday said it expects state-run refiner Indian Oil Corporation's (IOC) net debt levels to increase due to its large capital expenditure and investment plans.

In a separate statement, the American agency similarly affirmed state-run explorer Oil India Ltd's (OIL) rating at 'BBB-', which is equivalent to its India sovereign rating.

The 'BBB-' rating with stable outlook "equalises IOC's rating with that of its largest shareholder, the State of India (BBB-/Stable), based on Fitch's Government-Related Entities (GRE) rating criteria," Fitch said.

"Fitch expects IOC's capex to remain high to upgrade refineries to meet new emission standards (BS-VI) and to expand refining and petrochemical capacity, including the expansions currently underway.

"Fitch forecasts average capex of Rs 25,000-30,000 crore per annum over the next five to six years," it said.

According to the agency, IOC's financial profile is likely to remain moderate over the medium term due to its high capital expenditure (capex) and investment plans.

The country's largest oil marketing company (OMC) has reduced its net debt to 2 in fiscal 2017-18, from 2.7 in the financial year 2015-16, due to its higher gross refining margin (GRM) on converting a barrel of crude to petroleum products.

"We expect IOC's net debt levels to increase due to its large capex plans in the medium term. However, we believe IOC's credit metrics will remain comfortable with net leverage of around 2.5x over the next two to three years, provided its dividend outflow normalises from the high levels of the last two years," it said.

"High capex requirements are likely to keep free cash flows negative over the next few years."

"Fitch assesses the socio-political implications of a default by IOC as 'very strong'. A default would significantly affect the country's energy security given IOC's position as the largest OMC.

"IOC, along with two other state-owned OMCs, imports a large share of crude oil - a default would jeopardise their ability to do so, resulting in disruptions to the economy," it added.

According to the rating agency, it has assessed IOC's standalone profile at 'BB+' to reflect its dominant market position as the largest oil refining and marketing company in India, the improving complexity of its refining assets and a moderate financial profile.

It said the ongoing refinery upgrades are likely over the medium term to lower the impact of the historical volatility of Indian Oil's GRMs.

"We also expect IOC to benefit from strong demand for petroleum products in India over the medium term in light of its dominant market position," it added.

Regarding Oil India, which operates fields in the Northeast region, Fitch affirmed OIL's long-term foreign currency issuer default rating, senior unsecured rating and the rating on its outstanding senior unsecured debt at 'BBB-'.

"The company's standalone credit profile reflects its strong cost position, with low lifting and development costs, small scale, concentrated operation and moderate financial profile, which offsets its weaker business profile," the statement said.

Fitch has also affirmed the rating on OIL subsidiary Oil India International Pvt Ltd (OIIPL) at 'BBB-'.

"The outlook for OIL and OIIPL is Stable," it added.

--IANS

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