Fitch Ratings: Fuel Price Reduction To Hit Indian OMCs’ Financial Profiles

Singapore/Mumbai: The Indian government's directive to the country's three state-owned oil marketing companies (OMCs) to reduce petrol and diesel prices will have a negative impact on their profitability and credit metrics. However, the ratings will be unaffected as they are driven by state support. The ratings of Bharat Petroleum Corporation Limited (BPCL; BBB-/ Stable) and Indian Oil Corporation Ltd (IOC; BBB-/Stable) are equalised with the sovereign, while that of Hindustan Petroleum Corporation Limited (HPCL; BBB-/Stable') is aligned with its parent, Oil and Natural Gas Corporation Limited (ONGC).

The government reduced the prices of petrol and diesel by INR2.50 per litre on 4 October 2018 in response to rapid increases since the start of the year - the diesel price in Delhi, for example, has risen by 27%. Excise duty on these fuels has been cut by INR1.50, but the state OMCs have been directed to bear the cost of the additional INR1 per litre. Fuel prices will continue to be adjusted daily depending on future market moves, but the margins earned by OMCs have effectively been narrowed, which amounts to an implicit subsidy for consumers. The government has also requested the state governments to cut local taxes to further reduce fuel prices.

We estimate that the INR1 per litre cut absorbed by the OMCs will push up their net leverage (net adjusted debt/ EBITDAR) by 0.5x to 1.5x on an annualised basis, with the impact highest for HPCL, given its larger share of earnings from marketing operations. In the case of HPCL and IOC, the reduction in profits will add to debt requirements to fund large ongoing capex. Rising crude prices and the depreciating currency are also increasing the working capital requirements of OMCs, driving up debt levels.

Fitch expects HPCL's net leverage (including proportionate consolidation of HPCL-Mittal Energy Limited) to rise to 3.0x-3.5x for the year ending March 2019 (FY19) and deteriorate considerably thereafter if the new policy is kept in place through FY20. This could significantly reduce the headroom available to HPCL's current standalone profile of 'BB'. We expect BPCL's net leverage (including proportionate consolidation of Bharat Oman Refinery Limited) to increase modestly to beyond 2.5x and that of IOC to reach 3x during FY19.

The fuel-price reduction also highlights the regulatory risks for Indian OMCs as a result of rising crude oil prices and the weakening rupee. The elections due in 2019 further increase the risk of price controls if crude oil prices continue to rise or the rupee depreciates further. India liberalised fuel prices in 2014 and moved to daily revision in fuel prices in June 2017. Fitch believes that any further reversal of these fuel-price reforms will be negative for the OMCs' financial profiles and could affect the investment climate in the sector.

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