The ‘BBB-’ rating with stable outlook “equalises the India-based company’s rating with that of its largest shareholder, the State of India (BBB-/Stable), based on Fitch’s Government-Related Entities (GRE) Rating Criteria,” the rating agency said in a statement.

“Fitch expects IOC’s capex to remain high to upgrade refineries to meet new emission standards (BS-VI) and to expand refining and petrochemical capacity, including the expansions currently underway. Fitch forecasts average capex of Rs25,000-30,000 crore per annum over the next five to six years,” it said.

IOC’s financial profile, it said, is likely to remain moderate over the medium term due to its high capex and investment plans.

Its financial profile has improved over the last couple of years with net leverage (net adjusted debt/operating EBITDA) falling to 2.0x in the year ended March 2018 (FY18) from 2.7x in FY16 (FY17: 2.1x), mainly on account of higher gross refining margins (GRMs).

“We expect IOC’s net debt levels to increase due to its large capex plans in the medium term. However, we believe IOC’s credit metrics will remain comfortable with net leverage of around 2.5x over the next two to three years, provided its dividend outflow normalises from the high levels of the last two years,” it said.

Fitch said it has assessed IOC’s standalone profile at ‘BB+’ to reflect its dominant market position as the largest oil refining and marketing company (OMC) in India, the average-but-improving complexity of its refining assets and a moderate financial profile.

“High capex requirements are likely to keep free cash flows negative over the next few years,” it said adding it assesses IOC’s status, ownership and control by the sovereign as ‘strong’.

IOC has 80.7 million tonnes per annum of refining capacity (33% of the total in India). It operates 11 of the 23 refineries in the country. IOC also has a 49% share of the country’s crude and product pipeline (by length) and 44% share in petroleum products with over 48,170 customer touch points.

Fitch said IOC is exposed to the international crude-refining cycle as reflected in the volatility of its historical GRMs. However, the ongoing refinery upgrades are likely to lower the volatility impact over the medium term.

“We also expect IOC to benefit from strong demand for petroleum products in India over the medium term in light of its dominant market position,” it said.

“Petroleum-product consumption in India has increased strongly at a CAGR of 5.6% from FY12 to FY17 and we expect growth to remain strong (around 5%) over the medium term amid the prospect of robust GDP growth,” it added.

Also, IOC’s refining asset quality is expected to improve from the planned upgrade and expansion, resulting in higher profitability and cash flows.

IOC’s strong liquidity, Fitch said, is reflected in its large cash and cash equivalents of around Rs11,600 crore (including Oil Marketing Companies GoI Special Bonds) as at the end of FY18 against long-term debt maturities of around Rs3,500 crore.

In addition, the company had large unutilised working capital limits of around Rs8,000 crore as of end FY18. IOC also enjoys ready access to domestic and international capital and banking markets.