Oil India (OIL, BBB-/Stable) planned share buyback is likely to raise the company's net leverage (net adjusted debt/EBITDAR) to about 2.5x by the financial year ending March 2020 (FY20) from 1.4x in FY18, says Fitch Ratings. That is higher than our previous expectation of 2.2x, shrinking the already-low headroom for OIL's 'BBB-' standalone credit profile as Fitch's current negative rating guideline for net leverage is 2.5x.

The company announced on November 21, 2018 it plans to buy back 4.45% of its shares at a total cost of Rs 10.9 billion. This, in our view, will drive up OIL's net debt levels in addition to its need to fund its negative free cash flows due to its plans for higher capex (about USD 600 million per year) and dividends.

We expect both domestic and overseas capex to rise over the next two to three years. OIL aims to augment its domestic production and reserves and will also be required to contribute towards its share of the Mozambique liquefied natural gas development after the final investment decision is made, likely in mid-2019. We are not yet considering any benefit to OIL's financial or business profile from the higher capex over the next two to three years due to the uncertainty around its oil and gas exploration efforts and risks associated with the Mozambique asset.

OIL's current rating, which is based on its standalone credit profile, is equal to the rating of its largest shareholder, the state of India (BBB-/Stable), based on our assessment of the likelihood of support in line with Fitch's Government-Related Entities Rating Criteria. We have therefore not included a notching benefit. However, Fitch may consider a one-notch uplift to OIL's final rating if its standalone credit profile falls to 'BB+'.