Moody's: Indian Oil Corporation's ratings unaffected by government stake sale

Moody's Investors Service says that the Government of India's (Baa3 positive) sale of its 10% stake in Indian Oil Corporation (IOC, Baa3 positive) has no impact on the company's ratings. After the stake sale, the government will continue to hold a majority stake of 58.57% in IOC.

IOC's ratings remain supported by its strategic importance to the country, given its position as India's largest refiner and distributor of petroleum products.

IOC's Baa3 issuer rating incorporates its baseline credit assessment (BCA) of ba2, and a two-notch uplift for expected support from the Indian government under Moody's joint default analysis approach for government-related issuers.

"The government will retain its majority stake in the company after the stake sale, and as such does not affect our assessment of sovereign support for IOC," says Vikas Halan, a Moody's Vice President and Senior Credit Officer.

The stake sale in IOC is part of the government's disinvestment program by which it targets to raise INR695 billion in the fiscal year ending 31 March 2016 (FY2016).

"We will reassess the level of government support incorporated in the company's ratings only if the government's shareholding falls below 51%, or if there are other indicators of a change in the relationship between the government and IOC," says Halan. "However, we see this as an unlikely scenario, given the strategic importance of IOC as the country's largest downstream oil company with a 31% share of the domestic refining capacity."

Moody's would consider raising IOC's BCA if retained cash flow/debt exceeds 15% on a sustained basis. However, a raising of IOC's BCA will not automatically lead to a ratings upgrade, which will require an upgrade of the sovereign rating.

IOC's BCA could be lowered if its credits metrics deteriorate as a result of: (1) a higher than expected increase in the fuel subsidy burden; or (2) a large debt-funded expansion or acquisition; or (3) a sustained decline in refining margins or the efficiency of its operations.

Credit metrics indicative of downward pressure on its BCA include RCF/adjusted debt falling below 5%-10%. However, a lowering of IOC's BCA will not automatically result in a ratings downgrade.

IOC's issuer rating could come under downward pressure if (1) the sovereign rating is downgraded; (2) the government makes changes to the subsidy framework that negatively affect IOC; (3) IOC's BCA is lowered below ba3; or (4) the government's stake in IOC falls below 51% or its control in the company is otherwise reduced, leading to a reassessment of the level of support incorporated in IOC's ratings.

Powered by Capital Market - Live News