Fitch Ratings has affirmed Indian Oil Corporation's (IOC) Long-Term Foreign-Currency Issuer Default Rating at 'BBB-' with a Stable outlook, equalising it with India's sovereign rating. The affirmation reflects Fitch's assessment of 'Extremely Likely' state support, given the government's 51.5% ownership and control over the company.
Sharp Earnings Decline Expected in FY27
Fitch forecasts IOC's EBITDA will fall 50% to 60% in fiscal 2027, driven by higher input costs stemming from the Iran conflict. This more than offsets an abnormally wide gross refining margin and lower marketing profit due to stickier retail prices, despite a fuel price increase of INR 7-7.5 per litre since the conflict began. However, a recovery of 20% to 30% is expected in FY28 as crude prices move toward mid-cycle levels and gross refining margin normalises to around $6 per barrel.
State Support and Systemic Importance
"We equalise IOC's rating with that of its largest shareholder, the state of India, under our Government-Related Entities Rating Criteria. This reflects our 'Extremely Likely' assessment of state support," Fitch Ratings stated. The agency highlighted IOC's 'Very Strong' role in preserving government policy as India's largest state-owned oil refiner and transport fuel retailer. "The company's default would threaten India's energy security, given its key role in importing crude oil to meet a large share of the country's energy needs," Fitch added. It also noted strong contagion risk, where an IOC default could hurt funding access and borrowing costs for other government-related entities.
Leverage Spike and Capex Plans
Fitch expects EBITDA net leverage to temporarily spike in FY27 but stabilise between 2.5x and 3.5x from FY28 onward. Capital expenditure will remain elevated at around INR 357 billion in FY27 and INR 375 billion thereafter, as IOC expands refinery and petrochemical capacity to over 13 million tonnes per annum by 2030. Free cash flow is projected to trend toward neutral from FY28 after the refinery expansion is completed.
Outlook and Rating Triggers
The Stable outlook hinges on the sovereign rating and state support. A downgrade of India's sovereign rating or a weakening of state support would trigger a downgrade for IOC. Conversely, an upgrade of the sovereign rating would lead to an upgrade for IOC, provided the assessment of state support remains unchanged.
