For Quick Alerts
Subscribe Now  
For Quick Alerts
ALLOW NOTIFICATIONS  
For Daily Alerts

Moody's Says Oil PSU Profits To Hurt If Govt Stops Price Revision During Polls

|

On Tuesday, Moody's Investors Service said that the profits of state-owned oil refiners like Indian Oil Corporation Limited (IOC) could take a hit if the government asks them to temporarily pause the daily revision of petrol and diesel prices ahead of the Lok Sabha Elections scheduled for April.

Previously, the daily price revision on retail prices of petrol and diesel were halted ahead of Gujarat (December 2017) and Karnataka (April-May 2018) state elections till the day of voting.

 

"Given India's upcoming general election in April-May, we expect the refiners' profitability may come under pressure if they are asked by the government to temporarily freeze the prices of petroleum products," Moody's said in a report.

It further said that the recovery of the losses could only be possible if the BJP-led NDA comes into power for a second term as it could allow the oil companies to do so as it did in during the state elections.

"A change in government may expose the oil companies to a new set of challenges that are harder to anticipate because the oil and gas sector policy of other parties contesting in the elections is not yet clear," it said.

Petrol prices across Indian cities have remained unchanged for three consecutive days as of Wednesday.

Moody's Says Oil PSU Profits To Hurt If Govt Stops Price Revision During Polls

Apart from the challenges of retail prices, state-owned oil marketing companies in India have strict policies regarding dividend and share buybacks. As per policy, all government-owned companies are required to pay a minimum dividend of the higher of 30 percent of the net income or 5 percent of net worth and conduct share buybacks if both net worth exceeds Rs 2,000 crore and cash and bank balances exceed Rs 1,000 crore.

Moody's expects state-owned oil companies like Oil and Natural Gas Corp (ONGC), IOC, Oil India Ltd (OIL) and BPCL to maintain high dividends payments as well as conduct share buybacks in fiscal 2020. While the oil producers will not be significantly affected, it will hurt the refiners in terms of credit quality.

 

"High dividend payments will further stress the refiners' credit metrics at a time when refining margins have weakened and capital spending is high. We expect the regional refining margin, which has weakened significantly since June 2018, to meaningfully improve only in the second half of 2019."

Further, IOC and BPCL will also need to invest in upgrading their refineries over the next 12-18 months to comply with tighter emission norms.

Moody's said ONGC and OIL's total outflow to the government has significantly declined since 2015 as they have stopped sharing the country's fuel subsidy burden and while companies continue to invest in exploration and development activities, they will likely be funded with retained cash flow. As a result, their borrowings are unlikely to increase meaningfully.

Despite dividend payments remaining at a similar level in fiscal 2020, share buyback amounts will likely fall as the oil companies' reduce their cash balances so that they do not qualify for share buybacks under the capital restructuring guidelines issued by the Department of Investment and Public Asset Management in May 2016, it said.

ONGC and IOC have conducted buybacks in the current fiscal and are unlikely to do so anytime soon.

"The government has been increasing its reliance on the oil and gas sector as a source of revenue over the years. As oil prices fell in early 2016, the government imposed taxes on the production of petroleum products which accounted for about 24 percent of government revenue for fiscal 2018.

Following the recent increase in oil prices, the government had to cut these taxes to limit the impact of high prices on consumers in India. We believe the government is unlikely to raise these taxes so close to general elections in April and May 2019 because the taxes are ultimately passed on to end consumers," it said.

This implies that dividend payments and share buybacks from these companies are a major source of revenue for the government to meet its fiscal deficit targets.

Read more about: moodys psu omc ioc
Story first published: Wednesday, March 27, 2019, 14:22 [IST]
Company Search
We use cookies to ensure that we give you the best experience on our website. This includes cookies from third party social media websites and ad networks. Such third party cookies may track your use on Goodreturns sites for better rendering. Our partners use cookies to ensure we show you advertising that is relevant to you. If you continue without changing your settings, we'll assume that you are happy to receive all cookies on Goodreturns website. However, you can change your cookie settings at any time. Learn more