Fitch affirms IOC's BBB- rating with stable outlook

International ratings agency Fitch today affirmed its 'BBB-' rating on country's largest oil marketer Indian Oil Corporation and also retained the 'stable' outlook on company's long-term foreign currency rating and unsecured debt.
The agency cited overall improved credit metrics and the strong operational and strategic linkages with the government, which owns 68.6 per cent in the company and the steeply declining under-recoveries as the main triggers for the view.
IOC continues to sell household LPG and kerosene at government-prescribed prices, which are lower than market prices. With the implementation of the direct benefit transfer scheme for LPG, IOC will be able to sell LPG at market prices, further reducing its total under-recoveries, the agency noted.

"Notwithstanding these developments, the state-owned downstream companies continue to be important policy tools of the state, as such Fitch equalises IOC's rating with that of the sovereign," the agency said in a report.
On benefits from diesel price deregulation, the report said the full deregulation of diesel price in October 2014 has completely eliminated under-recoveries on the sale of this product. Diesel accounted for around 45 per cent of under-recoveries in FY14 for OMCs.
According to the agency, IOC's under-recoveries fell by more than 50 per cent in FY15 to around Rs 35,000 crore and expects that there will be less pressure on working capital because it will not need to wait for the government subsidies.

Diesel deregulation would also provide a level-playing field for private refiners. However, this will not lead to substantial competitive pressure in the near term, as the state-owned oil marketing companies have significant infrastructure that the private players will have to build.
It expects IOC's working capital needs to come down due to a reduction of around Rs 25,000 crore in debt in FY15. In FY14, its consolidated debt stood at Rs 98,500 crore.