Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ rating to Rs 2,500 crore non-convertible debentures (NCDs) of Indian Oil Corporation Limited (IOCL) and has reaffirmed its 'CRISIL AAA/Stable/CRISIL A1+' ratings on the bank facilities and other NCDs.

The ratings continue to reflect the dominant position of IOCL in the oil refining and marketing sector and its strong operating efficiency. In fiscal 2022, revenues grew by 65% on a year-on-year basis to Rs.  602,179 crore, led by pickup in demand and a low base effect. Improvement in product spreads, uptake in demand and rising crude oil prices led to rise in overall gross refining margin (GRM) for the company, which improved to $11.25/bbl (barrel) in fiscal 2022 from $5.64/bbl in fiscal 2021. Operating performance was however adversely impacted during the first nine months of fiscal 2023 with the company reporting profits of Rs.863 crore against a profit of Rs. 18,637 crore during the corresponding period of previous fiscal. Despite significant improvement in GRMs, the performance was impacted due to a significant rise seen in crude oil prices, which could not be passed on to the customers; leading to the marketing margin taking a hit.

The ratings also factor in the company's strategic importance to the GoI and expectation of continued support from the latter. These strengths are partially offset by exposure to project implementation risk and inherent volatility in operating profitability owing to fluctuations in input prices.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of IOCL and its subsidiaries and joint ventures (JVs); the subsidiaries have been fully consolidated and the JVs have been proportionately consolidated. These entities are strategically important to, and have considerable operational linkages with, IOCL. The ratings also factor in government support.

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Strategic importance to, and continued support from, GoI

Oil refining and marketing is strategically important for India's economic development. Oil marketing companies (OMCs) dominate the domestic market for key petroleum products, such as motor spirits, high-speed diesel, superior kerosene oil and liquefied petroleum gas (LPG). Unhindered supply of these products in the domestic market depends 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 company's strategic importance or in the government’s management control will remain key monitorables.

Dominant position in the oil refining and marketing sector

IOCL dominates the oil refining and marketing sector. With 11 refineries, the company accounted for 32% of the refining capacity of India as on October 31,2022 and held around 42% share in the petroleum products market in fiscal 2022. Large, integrated operations, geographically diversified refining capacities and high utilisation enhance operational efficiency. The company’s market position is underpinned by its entrenched marketing and distribution infrastructure, with 35,268 retail outlets and 12,838 LPG distributors as on October 31,2022, along with aggressive branding and marketing exercises. These initiatives should help IOCL maintain a dominant share in the domestic petroleum market.

Weakness:

Modest financial risk profile for the rating category

Consolidated gearing has modestly increased to 1.2 times as on September 30, 2022 from 0.9 time as on March 31, 2022, due to impacted operating performance leading to higher dependence on working capital borrowing. Overall gearing is expected to remain at 1.2 times as on March 31, 2023. Degree of reliance on debt to meet the capital expenditure (capex) will remain a key monitorable.

Susceptibility to volatility in crude oil prices

Crude oil prices have been volatile over the past few years. Prices fell sharply to around $ 20 per bbl towards the end of March 2020, but subsequently recovered to pre-pandemic levels, averaging $ 64 per bbl by the end of fiscal 2021. The geopolitical tensions have, once again, increased crude oil prices to above $ 100/bbl during first quarter of current fiscal which has normalized to around $ 85/bbl during third quarter of current fiscal 2023. Average inventory of crude oil and finished goods of around 70 days make the operating performance of IOCL vulnerable to fluctuations in valuations of inventory stock. IOCL imports 80-85% of its crude oil requirement and, thus, remains susceptible to volatility in the rupee-dollar exchange rate and a corresponding increase in the value of imports. IOCL compensates these volatilities through the marketing margin, and the company’s ability to continue to do so will remain a key monitorable.

Liquidity: Superior

IOCL, a Maharatna company, enjoys strong financial flexibility, driven by support from GoI. The company's portfolio of oil bonds, large unutilised bank limits and access to low-cost funds from domestic and overseas markets can help raise resources when needed. Amongst, the total fund-based limits of Rs 82,248 crore, utilisation has averaged to around 70% in the past 12 months.

For fiscal 2023, at a consolidated debt level, against the debt repayment obligations of around Rs 11,300 crore, company has repaid around Rs 4600 crore during first half of fiscal 2023. Further against IOCL’s capex commitments of around Rs 28,500 crore for fiscal 2023, company has incurred capex of Rs 13,640 crore as of September 30, 2022. A similar capex of around Rs. 28,500 crore is expected for fiscal 2024, to be funded through a mix of operational cash flow and external borrowings.

Environment, social and governance (ESG) profile

The ESG profile of IOCL supports its already strong credit risk profile, which also benefits from support received from the GoI.

The oil and gas sector has a significant impact on the environment on account of the high carbon emissions released from the refineries and petrochemical plants. In line with this, IOCL has been continuously focusing on mitigating its environmental and social risks to ensure minimal impact.

Key ESG highlights

• IOCL undertook massive investments to deliver BS-VI standard fuels across the country.
• The company is working to deliver 20% ethanol-blended fuel by 2025. Company’s 2G ethanol plant (100 KLPD) at Panipat was dedicated to Nation by the Honourable Prime Minister of India on 10th August 2022. The Company is also setting up 3G ethanol plant (128 KLPD) at Panipat.
• IOCL has renewable energy (RE) portfolio of 237.42 MW (Solar plant capacity is 69.82 MW and wind plant capacity is 167.6 MW) as of March 2022. It also has solarised 19,502 ROs with a cumulative capacity of ~111.5 MW and is targeting to increase its RE portfolio significantly towards meeting net zero commitments and as a business diversification effort.
• The company is also spearheading the GoI’s SATAT (sustainable alternative towards affordable transportation) scheme which encourages production and sale of compressed biogas (CBG) across the country. It is marketing CBG from 17 CBG Plants through 31 retail outlets and 2 industrial consumers.
• With a view to lower operational emissions and expand its footprint in hydrogen fuel, IOCL is setting up a 5 KTA (40 MW) green hydrogen plant at Mathura refinery and a 2 KTA (16 MW) green hydrogen plant at Panipat refinery.
• IOCL has also been undertaking efforts to develop hydrogen and its applications through fuel cell technology in the country.
• The company is on its way to commission India’s first fuel cell grade hydrogen dispensing station at Gujarat refinery to facilitate the introduction of fuel cell electric buses on the iconic route of Vadodra to Statue of Unity.
• It has set up 2145 EV charging stations & 34 battery swapping stations at ROs across the country as on 31st March 2022 and has plan of setting up 10,000 EV Charging Stations by 2024.
• IOCL has forged a JV with Phinergy Ltd., a leading e-mobility company from Israel to develop and commercialize novel AL-AIR battery technology which is expected to help in resolving challenges of e-vehicles in terms of range anxiety, acquisition cost, safety issues, charging time etc.
• In water management, the company has been able to achieve nearly 90% waste water recycling in its refineries, striving for zero liquid discharge at installations. It has also set up rainwater harvesting projects covering over 2500 ha area across its installations.
• It’s governance structure is characterized by 50% of its board comprising independent directors, healthy investor grievance redressal and extensive disclosures.

There is growing importance of ESG among investors and lenders. The commitment of IOCL to ESG principles will play a key role in enhancing stakeholder confidence, given its 48% of market borrowing in its overall debt and access to domestic capital markets.

Outlook: Stable

IOCL will continue to benefit from government support given its strategic and economic importance and the criticality of the sector to the GoI.

Rating Sensitivity Factors

Downward Factors

• Higher-than-expected and sustained deterioration in IOCL’s standalone performance
• Change in GoI’s support philosophy or reduction in stake below 51%

About the Company

IOCL, a GoI undertaking, was formed in 1964 with the merger of Indian Refineries Ltd (incorporated in 1958) and Indian Oil Company Ltd (incorporated in 1959). IOCL is an integrated oil refining and marketing company. Along with its subsidiary, Chennai Petroleum Corporation Ltd ('CRISIL AAA/Stable/CRISIL A1+'), IOCL controls 11 refineries across India, which a combined capacity of 80.6 million tonne per annum, which accounts for 32% of the country's total capacity.

IOCL through a JV is also setting up a 9-mmtpa refinery at Cauvery Basin, Nagapattinam, at an estimated project cost of Rs 31,580 crores. JV is being formed, wherein IOCL and CPCL will together hold a 50% stake (i.e. 25% each in the JV), while the remaining 50% is to be held by other seed investors.

For the nine month ended December 31, 2022, IOCL reported profit after tax (PAT) of Rs 863 crore on revenues of Rs 637,883 crore as against PAT of Rs 18,637 crore on revenue of Rs 414,033 crore for the corresponding period of the previous fiscal.

Key Financial Indicators (Consolidated)*

*Above numbers reflect analytical adjustments made by CRISIL Ratings

Any other information: Not applicable