Indian Oil Coporation's fundamental credit quality has been weakening due to lower refining margins and rising under recoveries, Moody's Investors Service has said.
Moody's, however, affirmed its Baa3 issuer rating on Indian Oil Corp with a stable outlook.
"Whilst IOC's ratings remain unchanged, the company's fundamental credit quality has been weakening as a result of a combination of lower refining margins, and rising under recoveries, which require short-term funding before compensation is received from the government," Vikas Halan, a Moody's Vice President and Senior Analyst said.
Given the strategic importance of IOC to India's economy, Moody's continues to factor high government support in the ratings, thus maintaining IOC's final ratings at Baa3 with a stable outlook, it said.
Moody's believes that the company's credit metrics will remain weak over the next 12-18 months, given the government's reluctance to reduce fuel subsidies as well as an expected weak refining margin environment.
Moody's estimates that the fuel subsidies in India for the fiscal year ending March 2013 will reach close to Rs 1.9 lakh crore ($35 billion), which will be 38 per cent higher than the already record-high subsidies of Rs 1.4 lakh crore for the fiscal year ending March 2012.
Moody's expects that if these fuel subsidies are not reduced or the government does not provide more timely reimbursements, IOC's consolidated borrowings for the fiscal year ending March 2013 may surpass Rs 1.1 lakh crore from Rs 80,000 crore as of March 2012.
These additional borrowings result in incremental borrowing costs, that are not reimbursed by the government and lower IOC's retained cash flow, it said.
IOC's cash flow is also being affected by low refining margins.
Without considering inventory valuation losses, IOC posted its lowest refining margin of $2.73/barrel in the quarter ending June 2012.
"We expect IOC's refining margins to remain weak for the rest of the year and much of next year, within a band of around $3-5/barrel," Halan said.
Moody's currently has a negative industry outlook on the global refining and marketing sector.
