Rating Rationale

Strengths
* Strategic importance to, and continued support from, GoI
Oil refining and marketing activity is strategic for India's economic development. Currently, oil marketing companies (OMCs) dominate the domestic markets for key petroleum products, such as motor sprits, high-speed diesel, superior kerosene oil (SKO), and liquefied petroleum gas (LPG). Unhindered supply of these products in the domestic market is contingent 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. Any diminution in the strategic importance, or in GoI's management control will remain a key rating sensitivity factor.

GoI has also supported the OMCs through budgeted subsidies and discounts from upstream companies, minimising their sales-related under-recovery burden. Post de-regulation of diesel and favourable crude prices in the past, coupled with reduced consumption of subsidised LPG, the under-recoveries of OMCs have declined significantly. The government is likely to continue to support IOCL by absorbing a large portion of its sales-related under-recoveries, if any. Any change in the adequacy and timeliness of GoI support will constitute a key rating sensitivity factor.

* Dominant position in the oil refining and marketing sector
IOCL dominates the oil refining and marketing sector, with 11 refineries, and shares of about 33% and 45%, of India's refining capacity and petroleum market, respectively, as on December 31, 2017. The market position is underpinned by the entrenched marketing and distribution infrastructure, with around 46,500 touch points, and by aggressive branding and marketing exercises undertaken. These initiatives should help maintain the dominant share in the domestic petroleum market.

* Strong operating efficiency
This is backed by large integrated operations, geographically distributed refining capacity, and high capacity utilisation (about 105% in fiscal 2017). Throughput of crude at the refineries increased to 65 million tonne in fiscal 2017, from 57 million tonne in fiscal 2016. The operating margin improved to 10.0% in fiscal 2017 from 6.6% the previous fiscal as gross refining margin (GRM) increased to USD 7.7 per barrel (bbl) from USD 5.1 per bbl. Commissioning and ramp-up of the 15 million-tonne-per-annum (mtpa) refinery project, and the petrochemical complex in Paradip, Odisha, should further enhance the diversity and integration benefits.

Weakness
* Moderate financial risk profile
Adjusted gearing was 0.64 time as on March 31, 2017, and the net cash accrual to total debt ratio was 23% in fiscal 2017.

* Exposure to project implementation risks, given the large investment plans
Projects in the pipeline include setting up a polypropylene unit, upgrading existing refineries for delivering BS-VI compliant fuels, setting up a 5 mtpa LNG import terminal at Ennore, Tamil Nadu (through a JV), modernising and augmenting pipeline infrastructure, and investing in exploration and production at an expected investment of about Rs 20,000 crore per annum. Despite the company's experience in expanding and modernising refineries and pipeline infrastructure, CRISIL will continue to monitor project costs and timelines, and stabilisation of operations on completion.

* Limited pricing flexibility for SKO and LPG
The company is also exposed to under-recoveries on account of controlled prices of domestic SKO and domestic LPG. While GoI has provided budgetary support, the absence of an institutionalised mechanism to meet under-recoveries has delayed subsidy receipts in the past. This risk is partially offset by de-regularising of diesel (which was a major contributor to under-recoveries), implementation of the Direct Benefit Transfer scheme (DBT; or Pratyaksha Hastaantarit Laabh - PAHAL) for LPG, ongoing implementation of DBT for SKO, and clarity given by GoI on subsidy sharing. These initiatives will help in streamlining the mechanism for meeting under-recoveries; however, timely receipt of subsidy and a well-defined institutionalised mechanism will be necessary for the financial health of the sector on a long-term sustainable basis.