Moodys’ expects credit metrics of OMCs to improve

In a recent research note, Moody’s Investors Service said that it views the partial de-regulation of diesel prices as a positive step for BPCL and IOC towards recovering the Rs 9.6 per litre loss they incur on the sale of diesel.

Moody’s Investors Service, which is a division of ratings agency Moody’s, expects the credit metrics of BPCL and IOC to improve as diesel prices rise.

The agency feels that the move is credit positive for all three oil marketing companies (OMCs) because higher diesel prices will reduce the amount of fuel subsidy they need to temporarily absorb until they receive a full or partial payment from the government.

This is because the ability of companies to at least adjust prices would reduce their use of short-term borrowings to fund the under-recoveries in the interim, and lower their interest expense, which the government does not reimburse, Moody’s said.

While OMCs are partially, and sometimes fully, compensated for the under-recoveries, there is usually about a six-month delay between the realization of the under-recoveries and the government’s reimbursement of fuel subsidies.

According to the Ministry of Petroleum and Natural Gas, the under-recoveries to the three OMCs have been rising over the past three years. For the nine months ending December 31, 2012 diesel composed 59 percent of the companies’ total under-recoveries.