CRISIL expects downstream oil companies to retain their strong credit profiles despite the current pressure on their profitability. CRISIL's ratings on oil refining and marketing companies (HPCL — FAAA / P1+, BPCL — AAA / FAAA / P1+, IBP — P1+) reflect their current healthy credit profiles; their strong market positions, favourable debt protection ratios, financial flexibility, and government ownership support the ratings.

Despite profitability pressures in 2004-05 (refers to the financial year April 1 to March 31), HPCL reported a profit after tax of Rs12.77 billion on a net turnover of Rs597.93 billion. The corresponding numbers for BPCL were Rs.9.66 billion and Rs589.7 billion.

In the first quarter of the current fiscal, the profitability of the oil refining and marketing companies is likely to be depressed because of inflexible retail prices of petroleum products and volatile crude prices. The government of India's (GoI) policy of exercising control on retail prices of motor spirit (MS) and high-speed diesel (HSD) and the subsidy burden on account of under-recoveries on liquefied petroleum gas (LPG) and superior kerosene oil (SKO) will exert pressure on these companies' marketing margins.

Subsidy levels for these companies have increased significantly in the first quarter of 2005-06, due to increasing crude prices and delayed retail price changes.

For integrated companies that have both refining and marketing operations, improving gross reining margins cushions the impact of marketing losses to some extent; however even these companies are likely to feel the adverse overall impact on profitability and their financial risk profiles will therefore be stressed from current levels.

Active discussions are taking place between industry players and GoI about ways to temper the burden on oil marketing companies; GoI can relieve the pressure either through policy changes or price revisions. CRISIL believes that GoI will evolve a mechanism which could include sharing of subsidy with upstream companies like ONGC and GAIL. In addition, standalone refineries may also be called upon to share the subsidy burden, besides measures like price revision and duty cuts.

Therefore, CRISIL does not anticipate an impact of marketing losses on the credit profiles of downstream oil companies over the short to medium term. In the event of a prolonged period of high crude prices, the timeliness and adequacy of GoI measures will determine the credit strength of these companies.