The Hindu Business Line : Moody’s lowers IOC outlook to negative; RIL stable

Mumbai, Dec. 3 Moody’s Investors Service on Monday changed the outlook on the Baa2 issuer rating of Indian Oil Corp Ltd (IOC) to negative from stable, while affirming the stable outlook for the Baa2 issuer and senior unsecured rating of Reliance Industries.

“The change in outlook to negative reflects the persisting challenges arising from the oil subsidy scheme in India, and the consequent financial impact on IOC,” says Mr Terry Fanous, Senior Vice-President.

“The burden of under-recoveries is being exacerbated by the high oil prices which are straining IOC’s liquidity profile and credit metrics at the Baa2 rating level,” Mr Fanous added. IOC’s expansion programme, which entails active capital investments over the medium-term, is further challenging the rating.

The ratio of retained cash flow/debt is likely to remain below the 20 per cent guidance for the Baa2 rating in FY08 and FY09, based on the current subsidy scheme and continued high oil price environment.

The burden of under-recoveries is mitigated by the issuance of government oil bonds to oil marketing companies such as IOC. However, the frequency and amount of the bonds are straining the company’s operating and financial profile. Moody’s notes these challenges are tempered by IOC’s substantial equity stake in Oil and Natural Gas Corp (ONGC), which could be monetised over time.

The rating could be lowered if there is no material change in the subsidy scheme or in IOC’s capital structure, with the ratio of RCF/debt remaining below 15 per cent on a consistent basis.

Reliance Industries

“The Baa2 rating reflects RIL’s well-established and integrated production facilities and its globally competitive refining operations, which command higher margins relative to many of its competitors,” said Mr Fanous. The rating also recognises RIL’s moderate financial leverage and its substantial operating cash flow generation, he added. The Baa2 ratings reflect RIL’s sizable expansionary plan, which requires high capital investment, and entails execution risk, and its exposure to single-site complex, where most of its operations are located.

RIL’s operating cash flow generating capacity will be materially enhanced over the next 12-24 months, after the planned commissioning of the new Jamnagar green-field refinery and the domestic gas project. At the same time, RIL has plans to undertake substantial investments in refining, petrochemicals, and E&P, as well as the retail sector.

RIL is well positioned in the Baa2 rating, which assumes that the company’s investments will be made in a manner that would not arterially weaken its financial profile.

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