 "Photo: Reuters")
State-owned Indian Oil Corp's (IOC) current credit has enough headroom to absorb higher leverage arising from a planned Rs 110 billion share buyback and interim dividend payout, Fitch Ratings said on Monday.
The board of IOC last week approved buyback of up to 297.6 million equity shares, or 3.06 per cent of share capital, at Rs 149 per share aggregating to Rs 44.35 billion. It also approved payment of Rs 65.56 billion as interim dividend to shareholders.
"IOC will retain adequate headroom under its 'BB+' standalone credit profile despite higher leverage cause by a planned share buyback and interim dividend, announced on December 13," Fitch Ratings said in a statement.
Fitch said Rs 44.35 billion share buyback and Rs 6.75 per share interim dividend, together with funding requirements for IOC's capex plans to upgrade refineries for new emission standards and expansion of refining and petrochemical capacity, will drive up leverage.
It expected capex of Rs 230 billion in FY19 and Rs 27,500 crore in FY20 to result in continued negative free cash flow. "However, IOC should benefit from the capex over the long-term, with enhanced asset quality and capacity improving its business profile and operating cash flow."
The government is pushing cash-rich PSUs to pay higher dividends and buyback shares using their reserves so as to help meet its budget deficit.
The government, which holds a 54.06 per cent stake in IOC, is expected to participate in the share buyback.
Besides IOC, at least half a dozen other central PSUs have disclosed share buyback programmes. Prominent among these include NHPC, Coal India, Oil India Ltd, BHEL, NALCO, NLC, Cochin Shipyard and KIOCL that could fetch the government a little over Rs 3,000 crore. The board of Oil and Natural Gas Corp (ONGC) is meeting this week to consider a share buyback.
"We expect IOC's net leverage, as measured by net adjusted debt/EBITDAR, to rise to about 2.9x by the financial year ending March 2020 (FY20), higher than our earlier forecast of 2.6x (FY18: 2.0x). Our negative rating guideline for the company's standalone credit profile is net leverage of 3.5x," Fitch said.
Fitch said it equates IOC's rating with that of its largest shareholder, the state of India (BBB-/Stable), based on the agency's Government-Related Entities Rating Criteria. IOC's standalone credit profile reflects its dominant market position as India's largest oil refining and marketing company, the average but improving the complexity of its refining assets, and its moderate financial profile.
In a public notice published in newspapers Monday, IOC said the maximum amount required by the company for the buyback is within permitted limits. "The funds for the buyback will be met out of internally generated cash resources of the company," it said.
The buyback offer size does not exceed 10 per cent of the aggregate of the fully paid-up equity share capital and free reserves.
IOC has general reserves of Rs 789.98 billion and a paid up equity share capital of Rs 97.11 billion.
"The buyback shall be on a proportionate basis from all the eligible shareholders of the company," it said.
At the Rs 149 per share, the government is likely to get about Rs 24 billion by tendering some of its shares in the buyback.
Besides, out of the total dividend payout of Rs 65.56 billion, the government is expected to get Rs 35.44 billion plus the dividend distribution tax.
The Department of Investment and Public Asset Management (DIPAM), which has been set a target to raise Rs 800 billion for the government through stake sale in central public sector enterprises, had prodded all cash-rich PSUs to go for share buybacks.
PSUs having a net worth of at least Rs 20 billion and a cash balance of more than Rs 10 billion have to mandatorily go in for share buyback.
Of the Rs 800 billion disinvestment target, the government has so far raised just over Rs 150 billion through minority stake sale in PSUs.
