Ind-Ra expects a pickup in profitability for upstream producers in FY22, led by higher crude prices and gas pricing reforms along with higher production. Although upstream companies have large capex plans and they continue to pay high dividends, the agency expects their credit metrics to remain strong in FY22 led by their scale and nature of operations, and strong liquidity, backed by the availability of liquid investments, sufficient banking lines and access to capital markets.

Higher domestic gas price could impact the margins of CGD players marginally, though they would continue to benefit from their competitive position with respect to other fuels. Furthermore, bringing natural gas under goods and services tax could boost the consumption gradually.

While the agency expects only a gradual pickup in gross refining margins in FY22, led by a muted improvement in crack spreads of key products, the marketing and pipeline segments would continue to provide cash flow stability. Petrochemical spreads, which had hit rock bottom in FY20, gained momentum over 9MFY21. Ind-Ra expects them to remain at higher than FY20 levels, despite a sharp pick-up in feedstock prices especially naphtha.

A lower subsidy burden and possible asset monetisation could help in meeting the high capex requirement of OMCs partly, though dividend outflows are expected to remain high. Policy-level changes during the stake sale of Bharat Petroleum Corporation or changes in the subsidy-sharing mechanism would continue to be key monitorables for assessing the linkages of OMCs with the government of India, the rating agency said.