IOC, BPCL buybacks possibly pressured by Centre to shore up its financials: Fitch

State-owned oil marketing companies’ (OMCs) financial profiles may be at risk in the near to medium term due to pressure from the government to increase shareholder returns, according to Fitch Ratings.

Oil marketers Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and upstream entity Oil India (OIL) 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 March 31, 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 the elections in April and May 2019,” Fitch Ratings said, adding that higher shareholder returns would put more pressure on the financial profiles of the companies that have large investment plans for the next two years.

Upgradation plans

IOC and BPCL are in the process of upgrading and expanding their refineries and improving downstream integration in petrochemicals, while OIL plans to augment its domestic production and reserves. OIL has limited headroom in its current standalone credit profile of ‘BBB-’, which may be revised down if the weakening of its financial profile results in net leverage exceeding 2.5x.

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-’.

In comparison, IOC and BPCL have more headroom in their ‘BB+’ standalone credit profiles and are likely to remain resilient even in case of any modest weakening in their financial profiles. OMCs additionally face the risk of government intervention in fuel prices during elections.