Fitch Ratings says higher risks to Indian oil marketing firms' standalone profiles

Standalone credit profiles of India's oil marketing companies are at greater risk of downward revision due to the coronavirus-induced drop in demand and refining margins, and their continued investments, Fitch Ratings said on Monday.

However, the Issuer Default Ratings (IDRs) of Indian Oil Corporation Ltd (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL), which are driven by sovereign linkages through the state's direct or indirect ownership, will remain stable.

"We expect the net leverage of the three companies to weaken over the financial year ended March 2020 (FY20) and FY21 to levels where we would consider revising their SCPs (standalone credit profile) downwards, before improving to in line with their current SCPs from FY22. The weakened metrics leave minimal headroom for the SCPs of HPCL and BPCL and limited headroom for IOC's," it said.

 

Fitch in a statement said the FY20 financial profiles of the three companies were likely to have been affected by large inventory losses due to the steep fall in crude oil prices in the last fortnight of March 2020 and by weakened demand during the period.

There was also a short-term disruption in the receivables cycle.

"All these will lead to a spike in FY20 gross debt, which pushed up their leverage metrics," it said.

"We expect the three companies' leverage in FY21 to remain above levels appropriate for their SCPs as they face lower demand, weak refining margins, high capex, though below earlier estimates, and continuing dividend outflows."

However, these factors will be partly offset by higher marketing margins until May 5, 2020 and lower working capital requirements given the low oil price assumptions.

Fitch cut its FY2021 forecast for industry-wide gross refining margin (GRM) by around 35 per cent as it expects product cracks (or margins) to remain weak until global economic growth recovers materially from the coronavirus crisis.

It expected FY2021 GRMs to remain at around FY2020 levels excluding inventory losses in March 2020, due to weak product spreads, which are expected to improve gradually from the second half of FY2021 as demand gradually recovers.

The squeeze on GRMs should be partly offset by the reduced value of refining fuel losses due to low crude oil prices.

"We estimate FY21 marketing and refining throughput volumes to fall by 10-15 per cent for the industry as the decline in demand for transportation fuels reduces capacity utilisation. This includes a severe drop in demand in 1QFY21 due to measures to contain the spread of the coronavirus, followed by a gradual recovery over the rest of the year," it said.

However, the three oil marketing companies will benefit from lower working capital requirements during FY2021 due to low crude oil prices, as well as from our estimates of higher marketing margins on petrol and diesel until May 5, 2020.

The companies did not cut product prices for over six weeks despite a fall in global crude oil prices and weakening product spreads, which should help them mitigate inventory losses from the steep fall in crude oil prices, Fitch felt.

The increase in duties on petrol and diesel by the central government from May 6, 2020, should result in marketing margins reversing closer to normal levels.

FY2021 should also see lower subsidy accrual on liquefied petroleum gas (LPG) sales given the fall in international LPG prices.

The higher marketing margins should benefit HPCL more than BPCL and IOC given its higher share of earnings from marketing activities, it added.