Key Rating Drivers & Detailed Description

Strengths:

Strategic importance to, and continued support from, GoI

Oil refining and marketing is strategically important for India's economic development. Oil marketing companies (OMCs) dominate the domestic market for key petroleum products, such as motor spirits, high-speed diesel, SKO and LPG. Unhindered supply of these products in the domestic market depends on smooth operations of OMCs such as IOCL. The company should, therefore, remain strategically important to GoI, and continue to play a key role in implementing the government's socio-economic policies. Any diminution in the company's strategic importance or in GoI's management control will remain a key monitorable.

Dominant position in the oil refining and marketing sector

IOCL dominates the oil refining and marketing sector. With 11 refineries, the company accounted for 32% of India's refining capacity as on March 31,2022, and held around 42% share in India's petroleum products market in fiscal 2022. Large, integrated operations, geographically diversified refining capacities and high utilisation enhance operational efficiency. The company’s market position is underpinned by its entrenched marketing and distribution infrastructure, with 34,559 retail outlets and 12,813 LPG distributors as on March 31,2022, along with aggressive branding and marketing exercises. These initiatives should help IOCL maintain a dominant share in the domestic petroleum market.

Weakness:

Modest financial risk profile for the rating category

Consolidated gearing improved modestly to around 0.9 time as on March 31, 2022, from 1.1 times as on March 31, 2021, led by improved cash accruals and limited incremental debt drawdowns. Gearing is expected to remain to around 1.0 time as on March 31, 2023. Interest coverage has improved to 9.4 and 13.4 times in fiscal 2022 and fiscal 2021 respectively, as against 2.8 times in fiscal 2020, while net cash accrual/ adjusted debt has improved slightly improved to 0.3 time in fiscal 2022 from 0.2 time in fiscal 2021. Going forward, degree of reliance on debt to meet capital expenditure (capex) needs for the company will remain a key monitorable.

Limited pricing flexibility for SKO and LPG

The company has under-recoveries as prices of SKO and LPG in the domestic market are regulated. While GoI provides budgetary support, the absence of an institutionalised mechanism to meet under-recoveries delays subsidy receipts. This risk has been partially offset by de-regulation of the price of diesel and petrol (which were major contributors to under-recoveries in the past) and implementation of the Direct Benefit Transfer (DBT; or Pratyaksha Hastaantarit Laabh - PAHAL) scheme for LPG. Increased LPG penetration has also led to a sharp decline in kerosene consumption. These initiatives will help streamline the mechanism for meeting under-recoveries. However, timely receipt of subsidies and a well-defined institutionalised mechanism will help sustain the financial health of the sector in the long term.

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