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India Refiner Bonds Set for First 2012 Drop on Protests

Indian Oil Corp. Chairman R.S. Butola
R.S. Butola, chairman of Indian Oil Corp. Photographer: Andrew Caballero-Reynolds/Bloomberg

Bonds of Indian Oil Corp. are headed for the first monthly drop this year on concern the state-run refiner’s debt burden will increase after policy makers said they won’t raise prices of diesel sold below cost.

The yield on the Mumbai-based company’s 4.75 percent dollar debt due January 2015 rose 29 basis points to 3.75 percent in May, according to data compiled by Bloomberg. Yields on the 3.1 percent 2015 notes of Royal Dutch Shell Plc, Europe’s biggest oil company, increased two basis points even as they dropped 13 basis points for Seoul-based SK Innovation Co.’s 3.93 percent February 2015 securities.

The government won’t revise prices of regulated fuels including diesel, Oil Minister S. Jaipal Reddy said this month after an increase in gasoline rates triggered street protests in a nation where 30 percent of the population lives below the poverty line. Outstanding debt at Indian Oil, the country’s biggest refiner, jumped 43 percent to 755 billion rupees ($13.6 billion) as of March 31 from a year earlier, Chairman R.S. Butola said this week, citing delays in receiving subsidies.

“As retail gasoline prices went up this month there was great hope that diesel would follow,” Hemant Dharnidharka, head of credit research in Bangalore at SJS Markets Ltd., said in an interview on May 29. “But it looks like they won’t raise diesel prices, and that is a big negative for Indian Oil and its debt burden.”

Opposition Strike

Indian Oil, together with other state-run refiners Bharat Petroleum Corp. and Hindustan Petroleum Corp., raised gasoline prices by 11 percent on May 24. Opposition parties, led by the Bharatiya Janata Party, are planning a nationwide strike today to protest the move, while the Dravida Munnetra Kazhagam, the government’s second-biggest ally, said the raise caused “bitterness.”

The Trinamool Congress party, another coalition member that has called for the increase to be rolled back, has been a source of opposition to the government in the past. It stalled a plan to raise rail fares, blocked the passage of an anti-corruption law and scotched a proposal to allow foreign-direct investment in pensions.

Opposition to the gasoline-price increase is gathering momentum after government data showed inflation accelerated to 7.23 percent in April from 6.89 percent a month earlier. Quickening prices are prompting global investors to seek higher premiums to hold rupee-denominated debt, with the extra yield on 10-year notes over comparable U.S. Treasuries having widened 39 basis points this year to 691 basis points.

Political Will

The benchmark 8.79 percent securities due November 2021 rose today, with the yield dropping five basis points, or 0.05 percentage point, to 8.47 percent.

The cost of protecting the debt of State Bank of India, which some investors consider a proxy for the nation, is climbing. Five-year credit-default swaps on the lender rose 48 basis points in May to 380 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted in privately negotiated markets. The swaps pay face value if a company fails to adhere to its debt agreements.

“There appears to be this lack of political will to take the commercially logical call of raising diesel prices,” Alok Deshpande, a Mumbai-based analyst at Elara Securities Ltd., said in an interview yesterday. “This doesn’t augur well for the state refiners as lower fuel prices means they will need to take on more debt.”

‘Credit Positive’

India has been unable to take advantage of sliding crude prices as the rupee’s depreciation makes imports more expensive. Brent crude, the benchmark for most of the fuel sourced into the nation, has fallen about 14 percent this month to $103.15 a barrel. The rupee lost 0.4 percent today to 56.4375 per dollar, having weakened 6.6 percent in May.

The move to raise gasoline prices is “credit positive” for Indian Oil, Moody’s Investors Service said in a statement on May 29. The refiner’s outstanding debt will fall once it receives reimbursement of 208 billion rupees for the three months through March from the government as compensation for selling fuels below cost, it said. Moody’s rates the company’s long-term debt Baa3, the lowest investment grade.

“The company has to bear the burden of the subsidy and the government closes that gap at intervals,” Philipp Lotter, the Singapore-based associate managing director at Moody’s, said in an interview yesterday. “Indian Oil does get compensated by the government from time to time, and that helps them reduce their debt and maintain their credit metrics.”

Revenue Loss

The yield on Indian Oil’s dollar notes was little changed today and touched a three-month high of 3.77 percent on May 25. Dollar-based investors in Indian corporate bonds earned 1.4 percent in the past year, the second-worst performance among 11 Asian markets monitored by HSBC Holdings Plc.

State-run refiners are free to set prices of gasoline, and the government regulates rates for diesel, cooking gas and kerosene. While gasoline accounts for about 10 percent of Indian Oil’s sales by volume, the other three fuels bring in more than 60 percent.

The three state-run companies lose more than 5 billion rupees a day from selling fuels below cost, according to oil ministry data. While the federal administration partly compensates the refiners for the revenue forgone, they are forced to borrow from the market to run their daily operations as they receive the payments with a lag.

Indian Oil’s outstanding debt has almost tripled since March 2007, having increased in four of the past five years, according to Bloomberg calculations based on the company’s earnings statements.

“We continue to lose money on diesel and kerosene, but those prices are decided by the government,” Indian Oil’s Butola told reporters on May 28 in New Delhi. “Our debt levels are rising every day, and it will soon come to a time when banks will be wary to lend us.”

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