Workers perform maintenance work on Indian Oil Corp. tanks at Cochin Port in Cochin, India. (Photographer: Dhiraj Singh/Bloomberg)

Fitch Says Large Capex May Push Indian Oil’s Debt Higher

Fitch Ratings today said it expects state-owned Indian Oil Corp.’s net debt levels to increase due to its large capital expenditure and investment plans.

“Fitch expects the Indian Oil Corporation’s capex to remain high to upgrade refineries to meet new emission standards (BS-VI) and to expand refining and petrochemical capacity, including the expansions which are currently underway,” it said in a media statement.

The ‘BBB-’ rating with a stable outlook “equalises the India-based company’s rating with that of its largest shareholder, the State of India (BBB-/Stable)”, the statement said.

The ratings agency forecast an average capex of Rs 25,000-30,000 crore per annum over the next five to six years. It said IOC’s financial profile is likely to remain moderate over the medium term.

IOC has reduced its net leverage to 2 in financial year 2017-18 from 2.7 in financial year ended March 2016 due to higher gross refining margins.

We expect IOC’s net debt levels to increase due to its large capex plans in the medium term. However, we believe IOC’s credit metrics will remain comfortable with net leverage of around 2.5 times over the next two to three years, provided its dividend outflow normalises from the high levels of the last two years
Fitch Ratings

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The statement said it had assessed IOC’s standalone profile at ‘BB+’ to reflect its dominant market position as the largest oil refining and marketing company in India, improving complexity of its refining assets and a moderate financial profile.

“High capex requirements are likely to keep free cash flows negative over the next few years,” Fitch said.

It said IOC is exposed to the international crude-refining cycle as reflected in the volatility of its historical GRMs. However, the ongoing refinery upgrades are likely to lower the volatility impact over the medium term.

“We also expect IOC to benefit from strong demand for petroleum products in India over the medium term in light of its dominant market position,” it said.

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