Indian Fuel Retailers’ Leverage to Rise After Near-Term Improvement

Fitch Ratings believes the OMCs' significantly improved profitability may have contributed to the government's recent decision to halve its budgeted equity support to the OMCs to INR150 billion from INR300 billion, and postpone it to FY25 from FY24

FinTech BizNews Service   

Mumbai, February 2, 2024: Indian oil marketing companies’ (OMCs) EBITDA net leverage will rise in the financial year ending March 2025 (FY25) due to their moderating profitability, rising capex for both energy security and transition, and regular shareholder returns, following an improvement in FY24 on robust refining margins and increasing demand, says Fitch Ratings.

However, Indian Oil Corporation Ltd (IOC, BBB-/Stable) and Bharat Petroleum Corporation Limited (BPCL, BBB-/Stable) will maintain adequate headroom on their standalone credit profiles (SCP) in FY25, given the financial buffers being built in FY24. Hindustan Petroleum Corporation Limited’s (HPCL, BBB-/Stable) SCP headroom will reduce in FY25 as capex for its 74%-owned joint venture in Rajasthan peaks, but improve thereafter as the new plant is commissioned and starts contributing to cash flow.

Fitch Ratings expects IOC’s and BPCL’s EBITDA net leverage to rise to around 2x in FY25 from 1x-1.8x in FY24. HPCL’s EBITDA net leverage, including HPCL-Mittal Energy Limited (BB/Positive) and HPCL Rajasthan Refinery Limited on a proportionately consolidated basis, will rise to around 4.5x in FY25 from around 3.5x in FY24.

Fitch Ratings expects the OMCs to report record-high EBITDA in FY24, given strong gross refining margins (GRMs) and steady marketing profit after large retail losses in FY23. IOC, BPCL and HPCL reported GRMs of USD13.3/barrel (bbl), USD14.7/bbl and USD9.8/bbl, respectively, in 9MFY24. GRMs benefitted from high diesel product spreads and tight industry conditions, and were higher than mid-cycle levels (USD5.5–USD7/bbl average over FY14-FY23), but lower than record highs of FY23 (USD12–USD20/bbl). We expect product spreads to moderate next year on the ramp-up of new refining capacity and easing industry conditions.

Fitch Ratings believes the OMCs’ significantly improved profitability may have contributed to the government’s recent decision to halve its budgeted equity support to the OMCs to INR150 billion from INR300 billion, and postpone it to FY25 from FY24. We expect the OMCs’ peak profitability in FY24, currently exceeding Fitch’s previous expectations, to help them maintain adequate SCP headroom, despite incorporating the lower and delayed estimate of government support.

Fitch believes the impact of the recent shipping disruptions in the Red Sea on the OMCs’ freight costs and our USD80/bbl Brent price assumption for 2024 should be manageable, without material disruptions to actual oil production, or a wider escalation of attacks to more vital oil transport routes in the region. Total oil shipments via the Suez Canal, the SUMED pipeline and the Bab-el-Mandeb Strait accounted for about 12% of global oil seaborne trade in 1H23, according to the US Energy Information Administration.

Heightened volatility in crude prices amid emerging geopolitical risks, and/or cuts in India’s retail diesel and petrol prices, which have been constant since May 2022, present downside risks to our profitability estimates.

The Issuer Default Ratings of IOC, BPCL and HPCL are driven by their strong direct and indirect linkages with the state of India (BBB-/Stable) and the high likelihood of support.

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