Credit quality of Indian oil companies may weaken: Moody's

Cites rupee depreciation, rising crude oil prices for upward revision of fuel subsidy estimate

Moody's Investors Service has said that the credit quality of state-owned oil marketing and upstream oil companies in India will likely weaken for the rest of FY2014 (April 2013--March 2014), if the government continues to ask them, as it did in April-June, to share a higher burden of the country's fuel subsidies.

"We now expect fuel subsidies for FY 2014 at Rs 1.4 trillion-Rs 1.5 trillion, up from the Rs 1.3 trillion expected in June 2013," says Vikas Halan, a Moody's Vice President and Senior Analyst.

Halan was speaking on Moody's just-released sector comment titled, "Adverse Subsidy --Sharing Formula and Rupee Depreciation Will Weaken Credit Quality of Indian Oil Companies ".

The report cites the ongoing depreciation of the rupee and the rising crude oil prices as the reasons for the upward revision of its fuel subsidy estimate for FY2014.

The rupee has depreciated by about 10% and the crude oil prices have increased by about 6% since the beginning of June. Moody's projections for the subsidy total assumes that there will be no material changes in either the rupee exchange rate or the crude oil price for the rest of FY2014.

Accordingly, in Moody's view, the fuel subsidy for July-September 2013 will likely rise to Rs 350 billion-Rs 400 billion as compared to Rs 256 billion in April - June 2013.

"If the government continues with the same subsidy-sharing formula, as in April-June quarter, then the credit quality of the state-owned oil companies will weaken further," says Halan.

"However, in our base case scenario, we continue to expect the government to fully reimburse marketing companies by the end of FY2014 and reduce the burden on upstream companies," he adds.

According to the report, the total fuel subsidies actually declined in April-June 2013, the first quarter of FY2014, but because of the way the burden is shared out, the portion borne by the marketing and upstream companies rose overall, while that by the government fell.

The decline in fuel subsidy for the quarter was because of lower crude oil prices and reforms in domestic diesel prices.

State-owned oil marketing companies, Indian Oil Corporation Limited (IOC, Baa3 stable) and Bharat Petroleum Corporation Limited (BPCL, Baa3 stable), and the upstream Oil and Natural Gas Corporation (ONGC, local currency: Baa1 stable, foreign currency: Baa2 stable) reported weak results for April-June 2013.

However, on a normalized basis -- after excluding the effects of the fuel subsidies and foreign exchange losses -- EBITDA for both IOC and BPCL improved from a year ago, owing to higher gross refining margins and marginally higher sales volume.