State—run Indian Oil Corp, which posted weak financial results for the July—September quarter, will see improvement in its credit profile because of diesel price deregulation and falling crude oil rates, Moody’s has said.

IOC’s second quarter earnings were weak “because of lower refining margins and inventory valuation losses,” Moody’s Investor Service said in a report.

The company reported a negative refining margin of $2 per barrel in the quarter as against $2.3 per barrel gross refining margin (GRM) in first quarter.

“The fall in GRM was partly due to declines in regional refining benchmarks — which fell by $1 per barrel over the same period — and decreases in oil prices that resulted in inventory valuation losses,” it said.

It projected weak regional refining margins over the next 12 months as new capacity comes online in the region against the backdrop of slowing demand growth.

“But lower oil prices will lend some support to demand growth and may sustain margins at current levels or lead to some incremental improvements. We expect inventory valuation losses to increase in the quarter October—December owing to decline in oil prices since September but stabilize after that,” it said.

Moody’s said the deregulation of diesel prices along with declines in oil prices is expected to reduce fuel under— recoveries to around Rs 85,000 crore this fiscal compared to Rs 140,000 crore in 2013—14.

“The reduction in under—recoveries will lower IOC’s borrowing needs. IOC had already reported a decline in borrowings to Rs 62,000 crore at end—September 2014 from Rs 83,200 crore at end—March 2014. We expect the borrowings to decrease further as under—recoveries fall,” it said.

Borrowings will also fall when the government rolls out the Modified Direct Benefit Transfer Scheme from January 2015 in the entire country. Under this, the cost of subsidies for LPG cylinders will be directly transferred to the consumer and oil marketing companies, including IOC, will be able to sell their products at market prices.

Also, earnings will improve on commissioning of new refinery at Paradip.

“IOC has been constructing a 15 million ton per annum capacity refinery at Paradip, which will be commissioned in 2015. The new plant will raise IOC’s refining capacity by nearly 25 per cent and will also improve the overall complexity of its refining capacity. We expect it to boost margins for IOC,” it added.

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