Stacks of U.S. one-dollar bills are arranged for a photograph in New York. (Photographer: Scott Eells/Bloomberg)

Indian Oil To Raise Debt After Announcing Biggest-Ever Payout For Shareholders

Indian Oil Corporation Ltd. said it will raise $400-million (Rs 2,840 crore) debt, according to Bloomberg, days after it announced a dividend and its first-ever buyback.

That comes even as India’s largest oil refiner has a total debt of more than Rs 60,000 crore as of December against a cash balance of close to Rs 10,000 crore. BloombergQuint’s calculations showed that the company’s decision to reward shareholders will increase its debt pile.

But Indian Oil doesn’t see that as a concern.

“Even today our borrowing is close to Rs 60,000 crore but considering our investment and capital expenditure plans, this borrowing is not very high,” Sanjeev Singh, chairman at India’s largest oil refiner, told BloombergQuint. “Our debt-to-equity ratio is around close to 0.5. So, we are not a very high leverage company but with strong fundamentals.”

India Ratings, too, has an ‘IND AAA’ rating on the company, implying the highest degree of safety. To be sure, Indian Oil has a leverage ratio of close to 1.4 times, which may increase to at least two times by March 2019, according to BloombergQuint’s calculations.

The refiner last month announced its biggest-ever payout to shareholders in 17 years at a time the government, its promoter, is looking to raise funds to meet its divestment target for the ongoing financial year. That’s expected to cost the company close to Rs 12,000 crore and would entirely wipe out its cash balance, according to BloombergQuint’s calculations. On an average in the last 10 years, the company also generated a negative free cash flow—indicating its inability to generate enough cash to support business—of more than Rs 2,100 crore.

Of the total amount announced, the government will get close to Rs 5,942 crore and a dividend distribution tax—imposed by the government on companies as per the dividend paid to investors—of Rs 1,331 crore, BloombergQuint’s calculations showed. That will help it get closer to its Rs 80,000-crore divestment target for 2018-19—the government has collected Rs 54,000 crore so far this year.

Brokerage Nomura, however, had said such payouts will improve Indian Oil’s valuations. Indian Oil’s earnings per share and return-on-equity may improve and there can be a structural re-rating, according to its note.

Also read: Rewarding Shareholders May Add To Debt Pile Of Indian Oil