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  Business   Market  05 Oct 2018  Fitch said govt move on fuel prices to impact profitability of OMCs

Fitch said govt move on fuel prices to impact profitability of OMCs

PTI
Published : Oct 5, 2018, 4:43 pm IST
Updated : Oct 5, 2018, 4:43 pm IST

The government reduced the prices of petrol and diesel by Rs 2.50 per litre on October 4, 2018.

Fuel-price reduction also highlights the regulatory risks for Indian OMCs as a result of rising crude oil prices and the weakening rupee
 Fuel-price reduction also highlights the regulatory risks for Indian OMCs as a result of rising crude oil prices and the weakening rupee

New Delhi: The government directive to state-owned fuel retailers to subsidise petrol and diesel will have a negative impact on their profitability and credit metrics, Fitch Ratings said on Friday.

While cutting excise duty by Rs 1.50 per litre, the government had on Thursday asked Indian Oil Corp (IOC), Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL) to absorb Re 1 per litre increase in fuel rates.

Fitch, however, said the ratings of the three firms will be unaffected as they are driven by state support. The ratings of BPCL and IOC are equalised with the sovereign, while that of HPCL is aligned with its parent, Oil and Natural Gas Corporation Ltd (ONGC).

"The government reduced the prices of petrol and diesel by Rs 2.50 per litre on October 4, 2018 in response to rapid increases since the start of the year - the diesel price in Delhi, for example, has risen by 27 per cent. "Excise duty on these fuels has been cut by Rs 1.50, but the state oil marketing companies (OMCs) have been directed to bear the cost of the additional Re 1 per litre," Fitch said.

Fuel prices will continue to be adjusted daily depending on future market moves, but the margins earned by OMCs have effectively been narrowed, which amounts to an implicit subsidy for consumers, it said.

"The fuel-price reduction also highlights the regulatory risks for Indian OMCs as a result of rising crude oil prices and the weakening rupee," it said.

"The elections due in 2019 further increase the risk of price controls if crude oil prices continue to rise or the rupee depreciates further. India liberalised fuel prices in 2014 and moved to daily revision in fuel prices in June 2017.

Fitch believes that any further reversal of these fuel-price reforms will be negative for the OMCs' financial profiles and could affect the investment climate in the sector.

The government has also requested the state governments to cut local taxes to further reduce fuel prices.

"We estimate that the Re 1 per litre cut absorbed by the OMCs will push up their net leverage (net adjusted debt/ EBITDAR) by 0.5x to 1.5x on an annualised basis, with the impact highest for HPCL, given its larger share of earnings from marketing operations.

"In the case of HPCL and IOC, the reduction in profits will add to debt requirements to fund large ongoing capex," it said.

Rising crude prices and the depreciating currency are also increasing the working capital requirements of OMCs, driving up debt levels. Fitch expects HPCL's net leverage (including proportionate consolidation of HPCL-Mittal Energy Limited) to rise to 3.0x-3.5x for the year ending March 2019 (FY19) and deteriorate considerably thereafter if the new policy is kept in place through FY20.

This could significantly reduce the headroom available to HPCL's current standalone profile of 'BB'.

"We expect BPCL's net leverage (including proportionate consolidation of Bharat Oman Refinery Limited) to increase modestly to beyond 2.5x and that of IOC to reach 3x during FY19," it said. 

Tags: fuel prices, petrol, diesel, excise duty, fitch
Location: India, Delhi, New Delhi