Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ rating to the Rs.2500 crore non-convertible debentures (NCDs) of Indian Oil Corporation Limited (IOCL) and has reaffirmed its ‘CRISIL AAA/Stable/CRISIL A1+’ ratings on the existing debt instruments and bank facilities of the company. CRISIL Ratings has withdrawn its rating on NCDs worth Rs 2,500 crore upon their maturity. The withdrawal is based on independent confirmation of redemption of these NCDs and is in line with the CRISIL Ratings withdrawal policy.

 

The ratings continue to reflect the dominant position of IOCL in the oil refining and marketing sector in India and its strong operating efficiency. The ratings also factor in the company's strategic importance to the Government of India (GoI) and expectation of continued support from it. These strengths are partially offset by exposure to project implementation risk and inherent volatility in operating profitability owing to fluctuations in input prices.

 

Operating performance of IOCL improved sharply in fiscal 2024 with improvement in operating profit to Rs 75,377 crore at ~9.7% margin despite moderation in the gross refining margins (GRM) to $12.05/barrel (bbl) from $19.52/bbl last year, on the back of lower crude oil procurement price and no corresponding change in the price of key petroleum products – diesel and motor spirit resulting in healthy marketing margins. During the first quarter of fiscal 2025, operating profit declined on-year to Rs 10,159 crore at 5.2% margin owing to moderation in GRM to $6.39/bbl, and increase in prices of procured crude oil which could not be passed on to the customers; leading to the marketing margin taking a hit. GRM is expected to moderate in fiscal 2025 as compared to last year while physical performance is expected to remain strong which along with healthy marketing margins and moderate crude oil prices should support operating performance in fiscal 2025 and over the medium term.

 

Financial risk profile improved in fiscal 2024 with healthy accretion to net worth and lower debt levels given healthy operating cashflows. Gearing improved to 0.74 time as on March 31, 2024 and is likely to remain less than 1 time going forward despite part debt-funding of sizeable capex of about Rs 30,000 crore annually over the medium term given steady cash accruals. Degree of reliance on debt to meet the capex will remain a key monitorable.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of IOCL and its subsidiaries and joint ventures (JVs); the subsidiaries have been fully consolidated and the JVs have been proportionately consolidated. These entities are strategically important to, and have considerable operational linkages with, IOCL. The ratings also factor in government support.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

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, superior kerosene oil and liquefied petroleum gas (LPG). Unhindered supply of these products in the domestic market depends on the 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. GoI also holds 51.5% stake in IOCL and exerts management control. Any diminution in the company's strategic importance or in the GoI’s shareholding will remain 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 31% of the refining capacity of India as on March 31, 2024 and held around 42% share in the petroleum products market in fiscal 2024. 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 37,472 retail outlets and 12,880 LPG distributors as on March 31, 2024, along with aggressive branding and marketing exercises. These initiatives should help IOCL maintain a dominant share in the domestic petroleum market.

 

Improvement in the financial risk profile, albeit moderate for the rating category

Decline in debt on-year to Rs 1,32,628 crore as on March 31, 2024 alongwith improvement in networth has led the improvement in gearing to 0.74 times as on March 31, 2024 as compared to 1.10 times, last year. Adjusted interest coverage during fiscal 2024 stood at 10.29 times, an improvement from 4.61 times last year driven by improved operating profitability. While financial risk profile has improved, it remains moderate for the rating category. Healthy cash accruals and accretion to networth should result in gearing remaining at less than 1 time going forward despite part debt-funding of sizeable annual capital expenditure (capex). While IOCL has a sizeable capex of ~ Rs 30,000 crore annually spread across refining, marketing, pipelines and petrochemicals segments, financial risk profile should remain healthy with part debt-funding. Degree of reliance on debt to meet the capex will remain a key monitorable.

 

Weakness:

Susceptibility to volatility in crude oil prices and forex fluctuation

Crude oil prices have been volatile over the past few years. Prices of crude oil for Indian basket fell sharply to a low of around $20/bbl in April 2020 before rising sharply to over $110/bbl in March 2022; average procurement price stood at around $93/bbl in fiscal 2023 and around $84/bbl in fiscal 2024. Average inventory of crude oil and finished goods of around 70-80 days make the operating performance of IOCL vulnerable to fluctuations in valuations of inventory stock. IOCL imports 80-85% of its crude oil requirement and, thus, remains susceptible to volatility in the rupee-dollar exchange rate and a corresponding increase in the value of imports. IOCL compensates these volatilities through the marketing margin, and the company’s ability to continue to do so will remain a key monitorable.

 

Exposure to project implementation risk

IOCL is at various stages of implementation of large projects which is targeted to increase its refining capacity, pipeline infrastructure, petrochemical complex, and city gas distribution (CGD) capabilities and reach. The complexities in each of these projects vary depending on the scope, technical requirements, and location while the risks depend on implementation, timelines, and technology. At present, IOCL is implementing refinery expansion projects at Panipat, Gujarat, Barauni, and at Cauvery Basin through its JV apart from a petrochemical complex at Paradip, various pipeline, and CGD projects. A few of these projects are delayed with the company continuing to remain exposed to such project implementation risks given it has plans to incur about Rs 30,000 crore in capex each year over the medium term.

Liquidity: Superior

IOCL, a Maharatna company, enjoys strong financial flexibility, driven by support from GoI. The company's portfolio of oil bonds, large unutilised bank limits and access to low-cost funds from domestic and overseas markets can help raise resources when needed. Amongst, the total fund-based limits of Rs 92,389 crore, utilisation has averaged at 50-60% in the past 6 months through August-2024.

Healthy cash accruals and available liquidity should be sufficient to meet scheduled debt repayment obligations of Rs 19,400 crore in fiscal 2025 and ~Rs 12,700 crore in fiscal 2026. IOCL’s annual capex plans of around Rs 30,000 crore is expected be funded through a mix of operational cash flow and external borrowings.

 

Environment, social and governance (ESG) profile

CRISIL Ratings believes IOCL’s ESG profile supports its strong credit risk profile.

The Oil and Gas sector has a moderate environmental and social impact, primarily driven by its raw material sourcing strategies, waste intensive process, and its direct impact on the health of the environment.

 

Key ESG highlights:

• IOCL undertook massive investments to deliver BS-VI standard fuels across the country.
• The company is working to deliver 20% ethanol-blended fuel by 2025. Company’s 2G ethanol plant (100 KLPD) at Panipat was dedicated to Nation by the Honourable Prime Minister of India on 10th August 2022. The Company has also set up 3G ethanol plant (128 KLPD) at Panipat.
• IOCL has renewable energy (RE) portfolio of 247 MW as of March 2024. It has also solarized total of 31,647 retail outlets as of March 2024 with a cumulative capacity of ~165.57 MW and is targeting to increase its RE portfolio significantly towards meeting net zero commitments and as a business diversification effort.
• It has set up 9,059 EV charging stations & 91 battery swapping stations at retail outlets across the country as of March 2024 and has plan of setting up 10,000 EV Charging Stations in foreseeable future.
• In water management, the company has been able to achieve nearly 90% waste-water recycling at its refineries, striving for zero liquid discharge at installations. It has also set up rainwater harvesting projects covering over 2,900 hectare area across its installations.
• The company has a good track record of customer grievance redressal. Gender diversity remained in line with industry peers with women employees forming ~9% of the total workforce in fiscal 2024. However, the resolution rate for sexual harassment cases remained lower than industry peers.
• Its governance structure is characterized by ~50% of its board comprising independent directors, healthy investor grievance redressal and extensive disclosures.

 

There is growing importance of ESG among investors and lenders. IOCL’s continued commitment to ESG principles will play a key role in enhancing stakeholder confidence and ensure ease of raising capital from markets where ESG compliance is a key factor..

Outlook: Stable

IOCL will continue to benefit from its leadership position in the domestic oil refining and marketing segment and its strategic importance to the GOI.

Rating Sensitivity Factors

Downward Factors

• Higher-than-expected and sustained deterioration in IOCL’s performance
• Change in GoI’s support philosophy or reduction in stake below 51%

About the Company

IOCL, a GoI undertaking, was formed in 1964 with the merger of Indian Refineries Ltd (incorporated in 1958) and Indian Oil Company Ltd (incorporated in 1959). IOCL is an integrated oil refining and marketing company. Along with its subsidiary, Chennai Petroleum Corporation Ltd ('CRISIL AAA/Stable/CRISIL A1+'), IOCL controls 11 refineries across India, with a combined capacity of 80.6 million tonne per annum, which accounts for 31% of the country's total capacity. As on June 30, 2024, GoI held 51.5% stake, ONGC held 14.2%, insurance companies held 7.49% and balance was held by public and others.

 

IOCL through a JV is also setting up a 9-mmtpa refinery at Cauvery Basin, Nagapattinam, at an estimated project cost of Rs 38,830 crores. JV has been formed, wherein IOCL and CPCL will hold  75% and 25% stake respectively.

 

For the first quarter of fiscal 2025, IOCL reported consolidated profit after tax (PAT) of Rs 4,841 crore on revenues of Rs 219,864 crore as against PAT of Rs 19,450 crore on revenue of Rs 225,710 crore for the corresponding period of the previous fiscal.

Key Financial Indicators*

Particulars	Unit	2024	2023
Operating Income	Rs crore	775,698	860,317
Profit after tax (PAT)	Rs crore	42,889	11,468
PAT margin	%	5.5	1.3
Adjusted debt/adjusted networth	Times	0.74	1.1
Adjusted interest coverage	Times	10.3	4.6

*Above numbers reflect analytical adjustments made by CRISIL Ratings

Any other information: Not Applicable