Analysis of Plan by Indian Oil, BPCL, and HPCL to Raise Funds via Petrol Pump Licence Fee Securitization
Analysis for a Layman
This news report discusses a plan by three major state-owned oil marketing companies (OMCs) in India, namely Indian Oil Corporation (IOC), Bharat Petroleum Corporation Limited (BPCL), and Hindustan Petroleum Corporation Limited (HPCL), to raise a combined amount of Rs 5,500 crore (approximately $740 million) by securitizing the license fees they collect from petrol pump dealers.
Securitization, in this context, refers to a financial transaction where the OMCs bundle these future license fee cash flows into a security, which is then sold to investors to raise immediate capital. These license fees are typically charged to petrol pump dealers based on the volumes of fuel they sell.
The primary purpose of this securitization plan is to generate funds for the OMCs. IOC aims to raise Rs 2,500 crore, while BPCL and HPCL seek to raise Rs 1,500 crore each through this method.
While this form of asset monetization has been encouraged by the government to raise funds for various projects, it is worth noting that the urgency for such financing has reduced recently due to the substantial profits earned by OMCs from record refining margins.
In the past, OMCs have explored other financing methods, such as monetizing pipelines through Infrastructure Investment Trusts (InvITs). However, these initiatives did not materialize as OMCs found more cost-effective funding alternatives.
While innovative financing methods can provide capital, it is crucial to carefully balance costs and potential dilution of ownership. OMCs, with their strong core earnings, may have less need for complex financial deals.
Impact on Retail Investors
For retail investors in OMCs like IOC, BPCL, and HPCL, this plan demonstrates the companies’ efforts to reduce financing costs through innovative means. However, the urgency for such financing appears to be lower now, as these OMCs are generating significant internal funds from their core business operations, particularly in refining and marketing.
Retail investors should assess whether these complex financing structures offer substantial savings compared to traditional debt or equity options without diluting their ownership in the companies. It is essential to focus on the fundamentals of the OMCs’ core businesses and consider whether valuations already reflect their strong short-term prospects.
Investing in OMCs should prioritize business fundamentals over complex financing structures. While such structures may offer benefits, they should be evaluated in the context of long-term shareholder value.
Impact on Industries
The securitization of license fees provides lenders and investors with access to stable cash flows linked to retail fuel sales. These cash flows are associated with the credit profile of OMCs, making them potentially attractive for investors seeking yield in fixed income options. Investment bankers play a role in facilitating these securitization transactions.
However, the attractiveness of these securities to insurers, pension funds, and other investors depends on whether the returns offered exceed those of other fixed-income investment options. There is also the counterparty risk associated with the OMCs potentially defaulting, although such a scenario is considered remote.
If these securitization deals succeed, other public sector undertakings (PSUs) may explore similar financing structures. Nevertheless, the complexity of these transactions should be carefully balanced against the actual savings achieved compared to traditional financing methods.
For dealers of OMCs, the risks associated with such securitization appear limited, as license fee obligations are typically passed on to the dealers. However, any clauses that impose liability on dealers in case of issuer defaults should be thoroughly scrutinized.
In summary, a balanced approach that avoids unnecessary complexity is recommended when considering innovative financing methods.
Long Term Benefits & Negatives
Over the long term, innovative financing methods that meaningfully reduce capital costs can assist PSUs in sustaining high capital expenditure plans without frequent dilution of equity. These methods can also promote financial discipline and leverage the strength of balance sheets for competitive financing rates.
However, it’s important to avoid over-engineering deals, which can lead to avoidable overhead costs. A strong balance sheet provides PSUs with negotiation leverage for competitive rates in traditional bank and bond markets, optimizing the capital structure. Engaging in financial engineering can also distract management from focusing on core operational excellence.
Creating complex holding structures may expose PSUs to financial engineering risks, as seen in the private sector in the past. Therefore, maintaining transparent and straightforward business models that are easy for minority shareholders to understand should take precedence over intricate financial structuring.
Short Term Benefits & Negatives
In the short term, having specialized financing options, such as securitization, allows PSUs to raise funds quickly if needed. However, the urgency for such financing may be lower now, given the strong internal funds generated by OMCs. Implementing complex financing structures comes with significant upfront costs, including legal fees, charges, and potential tax liabilities.
Unless these complex structures provide substantial savings and advantages over traditional financing methods, they can result in avoidable frictional costs. Additionally, the government, as the promoter of these PSUs, must balance its priorities between raising maximum funds for capital expenditure and ensuring optimal structuring of financing.
In the short term, PSUs have simpler levers at their disposal, such as taking on debt or selling stakes at acceptable valuations. Building investor confidence is also crucial, and this is best achieved by focusing on operational performance rather than complex financial maneuvers. Therefore, unless there are compelling reasons, PSU boards should prioritize simplicity over needless financial complexity.
Potential Impact of Oil PSUs Securitizing License Fees
The news of Indian Oil, BPCL, and HPCL considering securitizing their license fees could impact various companies in the financial and fuel retail sectors:
Indian Companies Potentially Gaining:
Banks and Financial Institutions:
- State Bank of India, HDFC Bank: Increased demand for loan refinancing by OMCs for the securitization process could benefit banks.
- Investment Banks and Asset Management Companies: Companies like ICICI Securities, Kotak Mahindra Capital, and Edelweiss Financial Services could potentially manage the securitization process and earn fees.
- Financial Technology Companies: Platforms offering transaction processing and blockchain solutions for securitization might see increased demand.
- Data Analytics Companies: Companies providing data analysis and risk assessment services for the securitization process could benefit.
Indian Companies Potentially Losing:
- Petrol Pump Dealers: Although the news mentions no direct impact on dealers, any change in the license fee structure or potential decrease in cash flow to OMCs could indirectly affect them through operational changes or future agreements.
- Investors in OMCs: If OMCs incur additional costs for the securitization process, it could potentially impact their profitability and dividends, affecting investor sentiment.
Global Companies Potentially Gaining:
- International Investment Firms and Hedge Funds: If the securitized notes are offered internationally, foreign investors might participate, providing additional capital for OMCs.
- International Rating Agencies: Companies like Moody’s, S&P Global, and Fitch Ratings might be involved in credit rating the securitized notes, generating fees.
Global Companies Potentially Losing:
- Global Oil Suppliers: If Indian OMCs focus on raising capital through securitization instead of exploring new oil sources or investments, it might potentially impact global oil trade dynamics in the long run.
The overall market sentiment is likely to be mixed. While banks, financial institutions, and technology companies could see positive sentiment shifts due to potential business opportunities, concerns about the impact on OMCs’ financials and potential cost implications might dampen investor sentiment for these companies. The exact impact will depend on the final details of the securitization plan and its execution.
Remember, this is a speculative analysis based on limited information. Further research and professional financial advice are crucial before making investment decisions based on this news.
“IOC, BPCL, HPCL in Talks to Raise ₹5,500cr by Securitising Licence Fee.” ET Bureau, 26 Dec. 2023,