Fitch affirms IOC rating, warns of 50-60% EBITDA drop in FY27

Fitch Ratings affirmed Indian Oil Corporation's BBB- rating with a Stable outlook, matching India's sovereign rating due to strong state support, despite forecasting a 50-60% EBITDA drop in FY27 from geopolitical stress and higher costs.

Fitch Ratings has affirmed Indian Oil Corporation's Long-Term Foreign-Currency Issuer Default Rating at BBB minus with a Stable outlook, equalising it with the sovereign rating of India.

The rating agency expects IOC's EBITDA to fall 50 to 60 percent in fiscal 2027 due to the Iran conflict and higher input costs, before rebounding 20 to 30 percent in fiscal 2028 as refining margins normalise. Despite the near-term pressure, Fitch sees IOC's state backing and dominant market position keeping credit risk contained.

State Support Underpins Rating

Fitch Ratings said the affirmation reflects "Extremely Likely" state support and equalises IOC's rating with India's sovereign rating of BBB minus with Stable outlook under its Government-Related Entities criteria.

"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 said. It added that the government directly owns 51.5 percent of IOC and appoints key board members, enabling control over the company.

Earnings Under Pressure Before Rebound

The agency flagged a sharp earnings decline in fiscal 2027 due to geopolitical stress. "We forecast EBITDA will drop by 50 percent to 60 percent in FY27. This is likely to stem from higher input costs that more than offset an abnormally wide gross refining margin as well as a lower marketing profit, driven by stickier retail prices, despite a rise of 7 rupees to 7.5 rupees per litre since the Iran conflict began," Fitch Ratings said.

However, it expects a recovery in fiscal 2028 as crude prices move toward mid-cycle levels and gross refining margin settles around 6 dollars per barrel.

Strategic Importance and Contagion Risk

Fitch Ratings highlighted IOC's policy role and systemic importance. "We believe IOC has a Very Strong role in preserving government policy, as it is India's largest state-owned oil refining company 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 Ratings said.

It also noted "Strong contagion risk," stating that IOC's default could hurt funding access and borrowing costs of other government-related entities.

Financial Outlook and Capex Plans

On finances, Fitch Ratings expects leverage to spike temporarily but stabilise thereafter. "We forecast EBITDA net leverage will remain in the range of 2.5 times to 3.5 times from FY28, following a temporary spike in FY27," the report said.

Capex will stay elevated at around 357 billion rupees in fiscal 2027 and 375 billion rupees thereafter as IOC expands refineries and petrochemical capacity to more than 13 million tonnes per annum by 2030.

Fitch Ratings said free cash flow should trend toward neutral from fiscal 2028 after the refinery expansion is completed.

Rating Outlook and Triggers

The Stable outlook hinges on sovereign rating and state support. Fitch Ratings said a downgrade of India's sovereign rating or a weakening of state support would trigger a downgrade, while an upgrade of the sovereign rating would lead to an upgrade for IOC, provided the assessment of state support remains unchanged. (ANI)

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