After paying hefty returns to shareholders in the form of dividends and share buyback, state-owned omcs including IOC, BPCL and Oil India may see heightened pressure during election phase, we take a closer look.
After paying hefty returns to shareholders in the form of dividends and share buyback, state-owned oil marketing companies’ including Indian Oil Corporation, Bharat Petroleum Corporation and Oil India may see heightened pressure on and face the risk of government intervention in fuel prices during the elections. According to Fitch Ratings, the firms’ financial profiles may be at risk in the near to medium term due to pressure from the state to increase shareholder returns.
Notably, IOC, BPCL and OIL have declared high interim dividends of 67.5% to 110% of the face value of their shares, and undertook share buybacks in the financial year ended 31 March 2019 (FY19). “These were likely to have been driven by pressure from the Indian government to increase shareholder returns to shore up the weak fiscal position and finance promises made ahead of elections in April and May 2019,” Fitch said in its report.
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Fitch noted that the higher shareholder returns will put more pressure on the financial profiles of the companies, which have large investment plans for the next two years. Notably, the oil majors IOC and BPCL are in the process of upgrading and expanding their refineries and improving downstream integration in petrochemicals, said Fitch. Further, OIL plans to augment its domestic production and reserves. In addition to the above BPCL and OIL are likely to invest in an upcoming Mozambique LNG project after a final investment decision on the project, which Fitch expects to be made in the second half of the year.
According to the rating agency, OIL current credit profile of ‘bbb-‘, may be revised down if weakening of its financial profile results in net leverage (adjusted net debt/operating EBITDAR) exceeds 2.5 times. “However, in such an event, OIL will benefit from one notch of support from the state, resulting in the final rating remaining unchanged at ‘BBB-‘,” explained Fitch in its report.
While elections may impact the performance in the near future, Fitch does not foresee any significant impact on OMCs’ financial profiles on account of fuel price controls. “We expect the OMCs to make up the losses in the subsequent period during the year in such an event. We believe OMCs will continue to revise prices daily to reflect the market prices over the medium term,” said the report.