Moody's Investors Service says that Indian Oil Corporation's (IOC, Baa3 stable) results for the quarter ending Dec. 31, 2013 (Q3) were affected by low fuel subsidy reimbursement by the Government of India (Baa3 stable). The results, however, show relatively stable underlying performance, and are supportive of the company's Baa3 issuer rating with a stable outlook.
''IOC had to absorb Rs 72 billion of net under-recoveries during the quarter, resulting in reported EBITDA of Rs 13.4 billion, which was 67% lower than the previous quarter'' says Vikas Halan, a Moody's vice president and senior analyst.
However, the company's normalized EBITDA, excluding the effects of under-recoveries and other one off items, increased by 11% to Rs 74 billion as compared to Q2. The performance was in line with the same period last year when IOC's normalized EBITDA was Rs 76 billion.
''Despite lower gross refining margin and a decline in throughput, normalized EBITDA for IOC increased, supported by higher product sales and an increase in other non-core income of the company,'' says Halan.
IOC's refining margin dropped 40% in Q3 to USD 4.56/bbl from USD 7.43/bbl in Q2. The weak refining margin was mainly due to the lower regional refining margins in the October to December quarter. In addition, IOC's recorded refinery throughput of 13.1MMT in Q3, lower than in 13.3 MMT in Q2 and 14.2 MMT in Q3 last year.
The sales volume for IOC, however, increased in Q3 to 19.1 MMT as compared to 17.6 MMT in Q2 but was lower than 19.7 MMT of sales volume achieved Q3 last year.
Also, other income, which includes interest and dividend income increased to Rs 17 billion in Q3 as compared to Rs 6 billion in Q2 and Rs 10 billion in Q3 last year.
IOC's nine-month operating performance recorded a significant improvement compared to a year ago. Its normalized EBITDA in Q3 was Rs 186 billion, a 26% increase from Rs 148 billion in the same period last year.
In the nine months ending December 2013, IOC incurred under-recoveries of Rs 525 billion, of which Rs 187 billion will be reimbursed by the government and Rs 250 billion by upstream oil companies, leaving the company with total net under-recoveries of Rs 88 billion.
The government of India, in its interim budget announced on Feb. 17 2014, increased the allocation towards fuel subsidy by Rs 190 billion to Rs 807 billion for FYE3/2014. Such increase in allocation just about covers the reimbursements of Rs 358 billion already promised by the government to the oil marketing companies for the first nine months of FYE3/2014, after excluding Rs 450 billion allocation pertaining to reimbursement promised by the government for the fourth quarter of FYE3/2013.
"The government has also budgeted Rs 573 billion for fiscal year ending March 2015, which may still be used to fully compensate the oil marketing companies. Nonetheless, the reimbursement is likely to be delayed until the next government is formed in May 2014. Such a delay would result in increase in borrowings of oil marketing companies, a credit negative," adds Halan.
IOC and other oil marketing companies uses short term borrowings to fund the under-recoveries during any delay in the government reimbursement.
The principal methodology used in this rating was Global Refining and Marketing Rating Methodology published in December 2009. Other methodologies used include the Government-Related Issuers: Methodology Update published in July 2010.
Shares of the company declined Rs 0.8, or 0.33%, to trade at Rs 239.80. The total volume of shares traded was 16,598 at the BSE (11.44 a.m., Tuesday).
