“These companies’ large dividend payments and high capital spending levels will keep their credit metrics weak, particularly in relation to retained cash flow on debt,” said Vikas Halan, Moody's vice-president and senior credit officer.
The credit profile of three public-sector oil refining and marketing companies — Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum — will stay weak for at least the next 12 months driven by higher dividend payouts and capital spending, Moody’s Investors Services said on Tuesday. “These companies’ large dividend payments and high capital spending levels will keep their credit metrics weak, particularly in relation to retained cash flow on debt,” said Vikas Halan, Moody’s vice-president and senior credit officer.
Dividends paid by the three companies — including distribution tax for the fiscal year ended March 2017 — increased to Rs 237 billion from Rs 85 billion the year before. The higher dividend payments were part of the overall trend in which the contributions from the oil and gas sector to the government of India has been increasing, the report claimed. The report estimates that the capital spending levels for the three companies will stay high over the next few years, with their combined capital spending for fiscal 2018 rising 15% year-on-year to Rs 350 billion, excluding acquisitions. However, the combined cash flow from operations would not be sufficient to meet their capital spending and dividend payments. “The shortfall of about Rs 50-Rs 75 billion will be funded by borrowings,” the report said.
The sector contributed 23.5% of the Central government’s revenue receipts including indirect taxes collected from consumers in FY17 compared with 15.6% in FY15. The increased dividend payments, combined with the companies’ elevated capital spending levels and acquisition of upstream assets, have weakened their credit metrics in fiscal 2017 to below the rating tolerance levels for their standalone credit profiles. The ratings agency expects the dividend payments by oil companies to fall in FY18, based on the government’s expectation of lower dividends in its Budget for the current fiscal year. However, even then, the level of dividends is more than double the total paid in FY16.