The rating agency expected dividend payments by the three companies to drop modestly in 2017-18, but remain higher than in 2015-16. The government expects to receive Rs67,500 crore of dividends from all state-owned companies in 2017-18, less than Rs77,000 crore estimated to have been received in 2016-17, but more than double than Rs30,800 crore in 2015-16.

“If we assume the three companies reduce the dividend in the same proportion as per the government’s expectations, they will pay a combined Rs20,600 crore in dividends (including distribution taxes), lower than Rs23,700 crore paid in fiscal 2017 but significantly higher than Rs 8,500 crore paid in fiscal 2016,” it said.

In a report titled ‘Oil refining and marketing—India: State-owned companies’ high dividend payments and capital spending will increase borrowings’, it forecast that the credit metrics of IOC, BPCL and HPCL will stay weak at least over the next 12 months.

“These companies’ large dividend payments and high capital spending levels will keep their credit metrics weak, particularly in relation to retained cash flow on debt,” says Vikas Halan, Moody’s vice-president and senior credit officer. Capital spending for HPCL and IOC will rise in the current fiscal as they continue expansion of their refining capacities, but will decrease for BPCL, which has completed expansion in September 2017.

All the three companies will continue spending to improve the efficiency of existing refineries and expand their marketing infrastructure. “Their combined capital spending for fiscal 2018 will be about Rs35,000 crore, up about 15% year over year, excluding acquisitions,” Moody’s said. However, the combined cash flow from operations of the three firms would be insufficient for capital spending and dividend payments.

“The shortfall of about Rs5,000 crore to Rs7,500 crore will be funded by borrowings,” it said. “The rise in borrowings comes after the companies’ credit metrics weakened in fiscal 2017. However, we expect their credit metrics to improve this fiscal year owing to higher sales volumes, stable margins and lower dividends.”

Moody’s said the ratings of the three firms incorporate a high level of support from the government, which can mitigate a moderate weakening of their standalone credit quality. Higher dividend payments were part of the overall trend in which the contributions from the oil and gas sector to the government have been increasing. The sector contributed 23.5% of the central government of India’s revenue receipts in 2016-17—including indirect taxes collected from consumers—compared to 15.6% in 2014-15.

“The increased dividend payments, combined with the companies’ elevated capital spending levels and acquisition of upstream assets, have weakened their credit metrics in fiscal 2017 to below the rating tolerance levels for their standalone credit profiles,” Moody’s said. Moody’s expects that the three companies’ credit metrics will improve for 2017-18, owing to higher sales volumes, improving margins and lower dividend payments.