Fitch affirms IOC at 'BBB-', outlook negative on refining volume, margins

Fitch Ratings on Monday said it has affirmed a 'BBB-' rating on state-owned Indian Oil Corp (IOC) with a negative outlook on the expectation of gradual recovery in refining volume and margins in the second quarter.

The rating assigned to IOC is equal to its largest shareholder, the state of India, Fitch said in a statement.

"We have maintained IOC's standalone credit profile (SCP) at 'bb+', as we expect net leverage to improve to a level that is in line with the SCP from the financial year ending March 2022 (FY22) after deteriorating to levels well above where we would consider revising the SCP downwards in FY20-FY21.

"Our rating case incorporates a gradual recovery in refining volume and margins from 2QFY21, stable average marketing margins, and controlled capex," it said.

However, the improvement is subject to the risk of weak industry conditions persisting beyond the baseline scenario.

IOC's rating benefits from its dominant market position in India, where it is the largest oil refining and marketing company, the above-average complexity of its refining assets, and improving diversification.

The government of India owns 51.5 per cent of IOC and appoints its board.

Fitch expects IOC's marketing volume to fall 12 per cent to 77 million tonnes (MT) in FY21 from a year earlier, and refinery throughout to also fall 12 per cent to 61.4 MT.

IOC's petroleum product sales fell to around 50 per cent of normal levels in April 2020 due to the nationwide lockdown, before improving to around 85-90 per cent by end-June as parts of the lockdown were relaxed and demand for transportation fuels (diesel, petrol, compressed natural gas) rose.

"We expect demand to gradually improve over the remainder of FY21, and increase in FY22 to pre-coronavirus levels, supported by a broader economic recovery," Fitch said.

IOC's liquefied petroleum gas (LPG) sales rose by 10-12 per cent in 1QFY21 as people staying home boosted domestic LPG consumption and the government provided free LPG to poor households.

Fitch expected recovery in aircraft turbine fuel to take longer than other products, but the impact for IOC will be limited due to the low contribution to total volume (6 per cent of IOC's FY19 domestic sales) and the ability of its refineries to switch to other products.

The rating agency expected IOC's gross refining margins (GRM) to fall to USD 1.1 per barrel in FY21, from USD 2.64 per barrel in FY20, excluding inventory changes. This is due to weakness in gasoline and diesel cracks, partly offset by discounts on crude oil purchases and surplus low-cost crude inventory in floating tankers and strategic reserves.

GRMs are expected to improve to around USD 5-5.5 per barrel in FY22-FY23 on better demand-supply balance, lower fuel losses and processing costs, albeit still below the peak margins during FY16-FY18's low crude oil prices (USD 48-58 per barrel).

Fitch expected IOC's annual capex to drop to Rs 20,000 crore in FY21-FY23, from Rs 27,300 crore in FY20 (excluding right-of-use assets).

The company may defer and/or re-evaluate the feasibility of discretionary refining and petrochemical projects including the proposed Ratnagiri refinery, and the brownfield expansion or upgrade of some refineries, and upstream investments, due to uncertain industry conditions.

However, investments in marketing and pipeline infrastructure (around 50 per cent share of FY19-FY20 total capex), and other ongoing projects will continue, it added.