After BPCL, Indian Oil announces rights issue of equity shares

Indian Oil Corporation (IOC), the nation's top oil firm, plans to raise capital through rights issue of equity shares as part of a government's plan to infuse capital into three state-owned fuel retailers to fund their net zero carbon emission projects.

In a stock exchange filing, IOC said its board will meet on July 7 "to consider raising of capital through Right Issue of equity shares to meet the capital expenditure plan for its various projects, subject to various statutory approvals as may be required."

The government, which is the majority owner of the company, is likely to subscribe to the rights issue and infuse equity in the company.

The board of Bharat Petroleum Corporation Ltd (BPCL) had on June 28 approved raising up to Rs 18,000 crore through a rights issue.

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The government had in the annual Budget for 2023-24 (April 2023 to March 2024 fiscal) announced Rs 30,000 crore of capital support to state-run fuel retailers -- BPCL, IOC, and Hindustan Petroleum Corporation Ltd (HPCL) -- to support their energy transition and net zero initiatives.

HPCL, which is majority owned by state-owned Oil and Natural Gas Corporation (ONGC), is likely to make a preferential share allotment to the government to get the capital.

IOC had last month doubled its authorised share capital to Rs 30,000 crore.

Commenting on the move, Fitch Ratings said the announcements of plans to raise equity capital should strengthen capex spending of the oil firms and the credibility of their emission-reduction plans.

"An injection of capital from the Indian government would provide further evidence for our assumption that the two companies would receive extraordinary sovereign support if needed, the key factor underpinning their 'BBB-'/Stable ratings," it said.

Fitch said the planned aggregate equity infusion may be higher than the budgetary allocation due to minority investors' participation in the rights issues.

"All three oil marketing companies (OMCs) last year announced targets to reduce scope 1 and 2 emissions (those directly emitted by the firm itself and those indirectly stemming from its energy or cooling purchases) to zero. BPCL and HPCL seek to do so by 2040, and IOC 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," it said.

As part of its energy-transition goals, BPCL is also looking to expand its renewable power generation portfolio to 1GW by 2025 and 10GW by 2040, from 50MW currently. IOC is also looking to expand its renewable energy portfolio substantially from the current level of 238MW, and to install 10,000 electric vehicle charging stations in the next three years, from the 1,900 it has already.

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In addition, both firms aim to reach an average 20 per cent ethanol blend in their petrol across India by 2025, up from the 10 per cent level that was achieved in June 2022, and to build green hydrogen plants.

"Higher capex on energy transition and emissions reduction may gradually have more influence on the OMCs' standalone credit profiles, but we do not expect it to play a significant role in the next few years," Fitch said adding its base case capex estimates for the OMCs already include green capex, although we expect investment in refining, petrochemicals, marketing infrastructure, pipeline capacity and city-gas distribution will continue to account for a majority of their high capex levels in the next few years.

An increase in the OMCs' green capex should coincide with waning refining capex over the medium- to long-term. "We believe the equity issuance would strengthen the OMCs' balance sheets, improving their capacity to undertake such capex."