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Rating Action:

Moody's affirms IOCL's Baa2 ratings; outlook stable

04 Jan 2019

Singapore, January 04, 2019 -- Moody's Investors Service has affirmed Indian Oil Corporation Ltd's (IOCL) Baa2 issuer and senior unsecured ratings.

At the same time, Moody's has assigned a Baa2 rating to IOCL's proposed USD- denominated senior unsecured notes.

The ratings outlook is stable.

RATINGS RATIONALE

"The affirmation of IOCL's ratings reflects our expectation that the company's leverage will stay within the tolerance level of its ratings, despite negative free cash flow because of high shareholder returns and capital spending," says Vikas Halan, a Moody's Senior Vice President.

On 13 December 2018, IOCL announced share buybacks and interim dividends which resulted in a combined total cash outlay of about INR123 billion, and increased its net borrowings by the same amount.

Consequently, IOCL's retained cash flow to debt will decline to 23% for fiscal 2019 (the year to 31 March 2019) from 29% for fiscal 2018, but still remain well above the downgrade threshold of 10%-15% for its ba1 baseline credit assessment (BCA).

"IOCL's ratings also remain constrained by the uncertainty around the Indian government's policy for the oil & gas sector, especially with respect to fuel pricing and consolidation in the sector," says Halan, who is also Moody's Lead Analyst for IOCL.

On 4 October 2018, the Government of India (Baa2 stable) unexpectedly imposed a INR1 per liter fuel subsidy on state-owned oil refining companies. While the move has not yet impacted the oil companies' credit metrics, uncertainty remains around future subsidies being imposed by the government on oil marketing companies.

The Government of India has also been looking to accelerate consolidation in the oil & gas sector, such that larger companies could be asked to acquire smaller ones. As such, larger oil companies such as IOCL remain exposed to event risk.

IOCL's ba1 BCA also continues to reflect (1) the company's large-scale petroleum refining and marketing operations in India; (2) IOCL's exposure to cyclical refining margins, fuel subsidies and high working capital swings that result in volatility in its credit metrics; and (3) IOCL's cash flow coverage metrics, which will likely remain constrained by high shareholder returns and capital spending.

The ratings also incorporate Moody's expectation of the high likelihood of extraordinary support from the Government of India for IOCL in times of need, a situation which results in two notches of ratings uplift.

Moody's support assessment reflects IOCL's vital role in India's oil & gas sector, given the company's position as the largest refining and marketing company in the country, accounting for 33% of total installed refining capacity and over 37% of the distribution of petroleum products consumed by volume in India. Moody's support assessment also reflects the government's significant control of IOCL's business strategy through its ability to appoint all of the company's board of directors, and the government's majority 54.06% equity ownership in IOCL.

IOCL's cash and cash equivalents as of 30 September 2018 were inadequate to cover its short-term borrowings. Nevertheless, the company has a long track record of rolling over its working capital loans and has strong access to the banks and capital markets, because of its status as a government-owned company.

The outlook on the ratings is stable and reflects the stable outlook on the sovereign rating of the Government of India. The stable outlook on IOCL's ratings also reflects Moody's expectation that there will be no adverse changes to the government's fuel pricing policy, and that IOCL will continue to execute its growth plans in a manner consistent with its ba1 BCA.

An upgrade of IOC's issuer rating to Baa1 will require both an upgrade of the Indian government's sovereign rating to Baa1, and an upgrade in the company's BCA to baa3.

IOCL's BCA can be upgraded to baa3 if there is clarity around the government's policy with respect to the oil & gas sector, and IOCL's own financial policy with respect to shareholder returns. Another factor supportive of a higher BCA is if IOCL's credit metrics improve because of a reduction in borrowings through free cash flow generation.

Credit metrics indicative of a higher BCA include retained cash flow (RCF)/debt — excluding inventory gains/losses — above 20%, and debt/EBITDA below 2.5x on a sustained basis.

IOCL's issuer rating could face downward pressure if (1) Moody's downgrades India's sovereign rating; (2) the government makes changes to the subsidy framework, such that the changes are negative for the company; (3) IOCL's BCA is downgraded to ba3; or (4) government ownership at IOCL is reduced to below 51% or government control is reduced by some other means, which would require Moody's reassessment of the level of support incorporated into the company's ratings.

Moody's would downgrade IOCL's BCA to ba2 if the company's credits metrics deteriorate, as a result of (1) a higher-than-expected increase in the fuel subsidy burden; (2) a large debt-funded expansion, acquisition or dividend payment; or (3) a sustained decline in refining margins or efficiency of operations.

Credit metrics indicative of a lower BCA include RCF/adjusted debt — excluding inventory gains/losses — below 10%-15%, and debt/EBITDA above 3x.

Moody's points out that a downgrade of the BCA to ba2 will not automatically result in a downgrade of IOCL's issuer rating.

The methodologies used in these ratings were Refining and Marketing Industry published in November 2016, and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Indian Oil Corporation Ltd, headquartered in New Delhi, is a leading downstream company specializing in oil refining, marketing, distribution, and the retailing of petroleum products, petrochemicals and natural gas.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Vikas Halan
Senior Vice President
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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