Indian Oil Corporation Has Enough Headroom To Absorb Buyback, Dividend Payout, Fitch Says

State-owned Indian Oil Corporation Ltd.’s current credit has enough headroom to absorb higher leverage arising from a planned Rs 11,000 crore share buyback and interim dividend payout, Fitch Ratings said on Monday.

The board of IOC had last week approved a buyback of up to 29.76 crore equity shares, or 3.06 percent of share capital, at Rs 149 per share aggregating to Rs 4,435 crore. It also approved payment of Rs 6,556 crore as interim dividend to shareholders.

"IOC will retain adequate headroom under its 'BB+' standalone credit profile despite higher leverage cause by a planned share buyback and interim dividend, announced on Dec. 13," the agency said in a statement.

Fitch said that Rs 4,435 crore share buyback and Rs 6.75 per share interim dividend, together with funding requirements for IOC's capex plans to upgrade refineries for new emission standards and expansion of refining and petrochemical capacity, will drive up leverage.

It expected capex of Rs 23,000 crore in financial year 2019 and Rs 27,500 crore in financial year 2020 to result in continued negative free cash flow. "However, IOC should benefit from the capex over the long-term, with enhanced asset quality and capacity improving its business profile and operating cash flow."

The government is pushing cash-rich public sector undertakings to pay higher dividends and buyback shares using their reserves so as to help meet its budget deficit. The government, which holds a 54.06 percent stake in IOC, is expected to participate in the share buyback.

Besides IOC, at least half a dozen other central PSUs have disclosed share buyback programmes. Prominent among these include NHPC Ltd., Coal India Ltd., Oil India Ltd, Bharat Heavy Electricals Ltd., National Aluminium Company Ltd., NLC India Ltd., Cochin Shipyard Ltd. and KIOCL Ltd. that could fetch the government a little over Rs 3,000 crore. The Oil and Natural Gas Corporation Ltd.’s board is slated to meet this week to consider a share buyback.

Fitch said it equates IOC's rating with that of its largest shareholder, the state of India (BBB-/Stable), based on the agency's Government-Related Entities Rating Criteria. IOC's standalone credit profile reflects its dominant market position as India's largest oil refining and marketing company, the average but improving the complexity of its refining assets, and its moderate financial profile.

In a public notice published in newspapers on Monday, IOC said the maximum amount required by the company for the buyback is within permitted limits. "The funds for the buyback will be met out of internally generated cash resources of the company," it said.

The buyback offer size does not exceed 10 percent of the aggregate of the fully paid-up equity share capital and free reserves.

IOC has general reserves of Rs 78,998.89 crore and a paid up equity share capital of Rs 9,711.81 crore. "The buyback shall be on a proportionate basis from all the eligible shareholders of the company," it said.

At the Rs 149 per share, the government is likely to get about Rs 2,400 crore by tendering some of its shares in the buyback. Besides, out of the total dividend payout of Rs 6,556 crore, the government is expected to get Rs 3,544 crore plus the dividend distribution tax.

The Department of Investment and Public Asset Management, which has been set a target to raise Rs 80,000 crore for the government through stake sale in central public sector enterprises, had prodded all cash-rich PSUs to go for share buybacks.

PSUs having a net worth of at least Rs 2,000 crore and a cash balance of more than Rs 1,000 crore have to mandatorily go in for share buyback. Of the Rs 80,000 crore disinvestment target, the government has so far raised just over Rs 15,000 crore through minority stake sale in PSUs.