Mumbai: Credit rating agency Standard & Poor’s on Tuesday revised its outlook for Indian Oil Corp (IOC) to stable from negative on expectations that the government will continue to compensate the company for selling fuel below market rates.
The outlook revision reflects IOC’s improving stand- alone credit profile led by a strengthened liquidity position and ongoing support from the Government of India, Standard & Poor’s (S&P) said in a note.
Meanwhile, the rating agency also affirmed its ‘BB+´ long-term corporate credit rating on the company.
“The affirmed (BB+) rating on IOC reflects the effect on the company from the government’s control of fuel prices, combined with the lack of an institutionalised mechanism to receive timely compensation for under-recovery of crude oil costs,” S&P’s credit analyst Yasmin Wirjawan said.
It also reflects IOC’s exposure to commodity cycles and its significant capital expenditure requirements.
“These risks are partly offset by IOC’s strong market presence, the potential for steady domestic demand growth, and the company’s improved liquidity position. We assess IOC’s stand-alone credit profile as ‘BB´,” S&P said.
According to S&P, the state-run firm has adequate liquidity and should be able to refinance its short-term borrowings on the strength its government ownership and support from state-owned banks.
S&P said there was an ”extremely high” likelihood of extraordinary government support for IOC in the event of financial distress as the company had a “critical” role for, and had a “very strong” link with, the government.
“We believe IOC has an important socio-economic role, being the dominant refiner and distributor of automotive fuels and supplier of cooking fuel in India . Unlike private domestic players, the company benefits from a subsidy and recovery mechanism from the government for products that it sells below market prices,” Wirjawan said.
The outlook also reflects the intention and the efforts of the government to make the compensation mechanism transparent and institutionalised, S&P added.