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Mumbai Dec. 31 Standard & Poor’s has lowered its corporate credit rating on India’s largest petroleum company, Indian Oil Corporation, on weaker liquidity and lack of timely support from the government. The outlook is, however, stable.

“The rating action reflects the deterioration in the company’s financial profile and liquidity position, coupled with delays in adequate support from the Government. The lack of an institutionalised mechanism to provide timely compensation for the under-recoveries of cost of crude oil is not in line with our expectations for equating the rating to the Government of India,” S&P said on Wednesday.

IOC, it said, has an important socio-economic role, being the dominant refinery and distributor of automotive fuels and supplier of cooking fuel. The strong influence of government policy on IOC’s operating strategy and financial policy, through the government’s control of retail prices of automotive and cooking fuels, apart from the subsidy-sharing arrangement, results in the government’s moral obligation to provide support.

“The government directly owns more than 80 per cent in IOC and appoints all 16 of its board members. However, the lack of timeliness in subsidy and liquidity arrangement is a negative, as it has resulted in high volatility in IOC’s financial and liquidity profile,” Mr Mehul Sukkawala, S&P’s credit analyst, said.

The company’s fund from operations for 2007-08 was small after adjusting for the oil bonds sold during the year. This resulted in its fund from operations to total debt ratio being only 4 per cent, S&P pointed out. In addition, the company went through a liquidity crunch in the six months ended September 2008, when it had limited cash and was rapidly approaching the single-borrower limits with government-owned banks.

According to the international rating agency, the liquidity crunch was primarily due to the time lag in the issuance of oil bonds by the Government.

More Stories on : Credit Rating | Petroleum

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