RPT-Fitch assigns IOC's USD500m notes final 'BBB-' rating

Fri Jul 26, 2013 3:19am EDT

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July 26 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has assigned Indian Oil Corporation Limited's (IOC, 'BBB-'/Stable) 5.75% USD500m senior unsecured notes due 2023 a final rating of 'BBB-'.

The assignment of the final rating follows a review of the final documentation materially conforming to the draft documentation previously received. The notes are rated at the same level as IOC's ratings as they represent direct, unconditional, unsubordinated and unsecured obligations of the company.

Key Rating Drivers

Sovereign linkages: IOC's IDR is equalised with that of India (BBB-/Stable) - which owns 78.92% of the oil company - to reflect strong strategic and operating linkages between the two entities. The state uses IOC as a tool to meet its economic objectives through subsidising the prices of diesel, kerosene (through the public distribution system) and liquefied petroleum gas (LPG) for household consumption sold in India. While the price of diesel is being increased steadily, the rupee's depreciation has resulted in under recoveries (UR) on diesel at INR8.6/litre in the last fortnight of June 2013.

Under recoveries largely state funded: In the financial year to March 2013, IOC's gross URs due to the sale of subsidised products were INR857.9bn (diesel: INR470.8bn, kerosene: INR195.1bn, and LPG: INR192.1bn). These were compensated to the extent of INR532.8bn (INR454.9bn) in budgetary support from the government and INR319.7bn (FY12: INR299.6bn) by upstream companies.

Dominant market position: IOC is the largest refiner in the country with a capacity of 65.7mtpa (million tons per annum), accounting for 30.55% of the country's capacity. IOC owns and operates 10 out of India's 22 refineries. In FY13, IOC refined 64.4mt (FY12: 66.2mt). Revenues were INR4,894bn (INR4,380bn) with a net profit of INR45bn (INR40bn).

Subsidy timing impacts cash flows: As IOC sells the three subsidised products at below market prices it would bear the losses in the short term which are then largely compensated by the state. On a quarterly basis, IOC had net UR in Q1FY13 of INR175bn, while URs for Q2 and Q3 were more than fully compensated for. The INR132bn cumulative net URs up to December 2012 and Q4FY13's URs were almost compensated for with total FY13 net URs amounting to INR5.5bn.

Rating Sensitivities

Positive: Future developments that may, individually or collectively, lead to positive rating action include

-An upgrade of India's sovereign rating provided that IOC's current linkages with the state are maintained

Negative: Future developments that may, individually or collectively, lead to negative rating action include

-A downgrade of India's sovereign rating

-A weakening of IOC's linkages with the state


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