Oil marketing companies' decision to raise funds through a rights issue for capital expenditure of Rs 40,000 crore in fiscal 2024 is a step towards reducing balance sheet debt, according to rating agencies.
The Indian government, which holds a majority stake in these public sector undertakings, had earlier announced budgetary support of Rs 30,000 crore and this equity infusion is expected to be part of that capital support.
The intention of the oil firms is to maintain a low balance sheet debt, said Hetal Gandhi, director of research—market intelligence and analytics at Crisil. This debt has not witnessed an “alarming” increase over the last few years, she said.
“If this is looked at from the government standpoint in their capex, that typically includes the inter-budgetary support, we have seen dependence on direct allocations than support of IEBR (internal and extra-budgetary resources), which includes debt taken by PSUs," she said.
Over the past three years, the government has opted for direct allocations instead of inter-budgetary funding, which includes substantial loans raised by public sector undertakings. This “direct allocation by the government signifies a step towards lowering of balance sheet debt”, according to her.
The move could also align with the government's pitch to secure a sovereign ratings upgrade. The government is in talks with ratings agencies such as Moody's Investor Service.
An injection of capital from the government would provide further evidence of the extraordinary sovereign support that these oil firms would receive if needed, which is a key factor that underpins their current BBB-/stable ratings, according to Mohit Soni and Duncan Innes-Ker of Fitch Ratings Inc.
The plans by Bharat Petroleum Corp. and Indian Oil Corp. to raise equity capital should strengthen their capex spending and the credibility of their emission reduction plans, Fitch said.
Bharat Petroleum aims to raise Rs 18,000 crore through a rights issue, with the objective of achieving energy transition and energy security goals. On the other hand, Indian Oil has announced that it will consider a rights issue during its upcoming board meeting on Friday. Additionally, IOCL has given the green light for increasing its authorised share capital by Rs 15,000 crore.
According to Fitch, there is a possibility that the planned aggregate equity infusion could exceed the budgetary allocation due to the participation of minority investors in the rights issues. Fitch said they will closely monitor the situation for further clarity on the matter.
While Hindustan Petroleum Corp., India's third major oil marketing company, has not made similar proposals as of yet, Fitch anticipates that HPCL will also receive a share of the government's capital support.
PSU Capital Expansion Plans
According to data from the Petroleum Planning and Analysis Cell and company announcements, the three oil marketing companies have outlined a capital expenditure plan of Rs 58,000 crore for financial year 2024.
In the long term, the three firms have set their sights on becoming net-zero companies before 2046, in terms of scope 1 and scope 2 emissions. Scope 1 emissions refer to direct emissions produced by the company itself, while scope 2 emissions encompass those arising indirectly from its energy or cooling purchases. BPCL and HPCL aim to achieve this target by 2040, while IOCL has set a goal of reaching net-zero status by 2046.
"We believe the OMCs have the execution capabilities to carry out these plans, but such long-term targets inevitably remain subject to risks, including energy demand-supply mismatches, slow or insufficient technological or policy progress and lack of infrastructure," Fitch said.
As a part of its energy transition goals, BPCL plans to increase its renewable power generation portfolio from the current capacity of 50 megawatts to 1 gigawatt by 2025 and further to 10 GW by 2040.
Currently standing at 238 megawatts, IOCL aims to enhance its renewable energy capacity. Additionally, the company plans to install 10,000 electric vehicle charging stations within the next three years, building upon the existing 1,900 stations.
Both firms aim to reach an average 20% ethanol blend in their petrol, across India by 2025. This is an increase from the 10% ethanol blend level that was achieved in June 2022.
Clean Transition
The majority of oil PSUs are focusing on enhancing petrochemical integration, promoting ethanol blending, adopting compressed natural gas, and driving the transition towards electric vehicles. These initiatives are expected to contribute to a decrease in the demand for petroleum products, according to Gandhi.
However, the level of EV penetration by 2030 will result in a stable demand for petrol, she said. In such a scenario, expanding downstream to petrochemicals presents an opportunity for the oil PSUs to replace imports and potentially increase exports of some products, according to her.
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