S&P flags pressure on Indian Oil as high crude prices squeeze margins

S&P Global Ratings on Friday said state-owned Indian Oil Corporation (IOC) faces rising pressure to balance fuel affordability with profitability as prolonged tensions in West Asia increase crude oil prices and squeeze marketing margins.

The ratings agency said disruptions in the Strait of Hormuz and elevated crude prices could widen the gap between domestic retail fuel prices and raw material costs, potentially hurting the company's earnings, cash flow and liquidity position over the next 12 months.

India, the world's third-largest oil importer, relies heavily on imported crude to meet domestic fuel demand, with diesel accounting for nearly 39 per cent of total petroleum consumption.

''IOC faces a conundrum. Its earnings and cash flow over the next 12 months are turning increasingly uncertain as the Middle East conflict becomes protracted. IOC has to balance its role of meeting the country's energy needs while absorbing losses due to high crude oil prices,'' it said. ''Given the widening gap between the pump prices and crude oil input price, we cannot rule out the possibility of a material base-case revision.''.

Shipping disruption in the Strait of Hormuz, resulting in elevated crude oil prices, potential feedstock shortages should the conflict prolong, and limited changes to the domestic pump prices are factors driving that possibility.

''We believe a prolonged Middle East conflict and high crude oil prices could erode the company's financial cushion and liquidity position,'' the rating agency said. ''However, IOC's strong banking relationships and access to funding markets could mitigate short-term liquidity stress.''.

IOC has available committed and uncommitted working capital lines with banks and a track record of raising funds through commercial paper issuances.

''In our view, IOC's minority stakes in Oil and Natural Gas Corp (ONGC), Oil India Ltd, and Gail (India) Ltd, with a combined market value of more than USD 3 billion, aid financial flexibility, if required,'' S&P said.

In addition, there is an extremely high likelihood of extraordinary support from the government should the IOC come under financial stress. Recent government support came in the form of excise duty cuts and a 3-4 per cent increase in petrol and diesel prices.

The standalone credit profile and issuer credit rating on IOC are on par with the sovereign credit rating on India (BBB/Stable/A-2).

IOC reported stronger-than-expected earnings for the fiscal year ended March 2026, helped by healthy fuel demand growth, improved refining margins and working capital gains, S&P added.

The results ''were better than our expectations with free operating cash flows of Rs 40,000 crore and S&P Global Ratings adjusted debt of close to Rs 1.3 lakh crore,'' it said.

Healthy volume growth, higher refining margins, and working capital gains have translated into an EBITDA of more than Rs 76,000 crore for the year.

S&P Global Ratings believes there is a high degree of unpredictability around the duration and scale of the Middle East war and its potential effect on commodity prices, supply chains, economies, and credit conditions. ''As a result, our baseline forecasts carry a significant amount of uncertainty. As situations evolve, we will gauge the macro and credit materiality of potential shifts and reassess our guidance accordingly.''

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)