Credit rating agency Moody's in a recent note has said that it expects credit profile of OMCs to improve over the next 12 months on the back of falling crude prices and subsidy burden.
Hike in LPG prices unlikely in the near-term
Vikas Halan
VP & Senior Credit Officer
Moody's
Credit rating agency Moody's in a recent note has said that it expects credit profile of OMCs to improve over the next 12 months on the back of this.
In an interview to CNBC-TV18, Vikas Halan, Vice President and Senior Credit Officer at Moody's, said he expects an improvement in trade profile of OMCs, which include credit metrics as well as the debt structure.
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"The credit metrics will improve because we expect borrowings to come down because of the lower subsidy burden, which will have a more profound impact than actual decline in subsidy," he said.
Halan said he expects the upstream discount to remain constant at Rs 60,000 crore and government portion to come down to Rs 40,000 crore – with the total subsidy burden coming down to Rs 100,000 crore in FY15. He sees interest cost reduction for OMCs at around Rs 1000-1500 crore and expects OMCs to pay out short-term debts.
Moody's sees IOC to benefit the most from subsidy burden reduction, while ONGC and Oil India too are likely to benefit from it.
The agency expects crude to average around USD 105/bbl in FY15 and feels gas price will be the next big trigger for the companies. Halan however doesn't see a hike in LPG prices in the near term.
Below is the verbatim transcript of Vikas Halan's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18
Latha: Can you take us through the argument? Do you see these companies now suffering les interest cost?
A: The story that we are written about is that we expect the credit profiles to improve for these oil marketing companies and the credit profile means both the credit metrics and the debt structure. So the credit metrics will improve because we expect the borrowings to come down because of the lower subsidy burden and this is going to have a more profound impact than the actual decline in subsidy because we expect the upstream discount to remain constant to about Rs 60,000 crore and we expect the government portion to come down to Rs 40,000 crore.
So overall subsidy will be about Rs 100,000 crore in fiscal 2015 versus Rs 140,000 crore in fiscal 2014. So the OMCs had to fund the government portion for a larger period of time because they had to get it for six months. That portion will come down from Rs 70,000 crore to Rs 40,000 crore, so a reduction of about Rs 30,000 crore that means assuming a six months funding period that borrowings will come down about Rs 15,000 crore. So that is a big chunk of Rs 140,000 crore borrowing that oil marketing companies carry under books. That is one source of improvement. The other as you rightly pointed out, there is going to be reduction in interest cost because of lower borrowings. We expect that to be around Rs 1,000-1,500 crore so that will increase the net earnings of these oil marketing companies depending on which borrowings they decide to pay and what is the effective interest cost saving.
IOC stock price
On August 20, 2014, at 11:12 hrs Indian Oil Corporation was quoting at Rs 359.40, up Rs 1.20, or 0.34 percent. The 52-week high of the share was Rs 385.35 and the 52-week low was Rs 194.50.
The company's trailing 12-month (TTM) EPS was at Rs 52.04 per share as per the quarter ended June 2014. The stock's price-to-earnings (P/E) ratio was 6.91. The latest book value of the company is Rs 271.80 per share. At current value, the price-to-book value of the company is 1.32.
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