Indian Oil Corporation Ltd. (IOC) has decided to withdraw its previously proposed rights issue worth ₹22,000 crore. The state-owned oil marketing giant announced this decision through a regulatory filing, citing the government's non-participation in the rights issue.

This move comes after IOC had initially approved the fund-raising plan on July 7, 2023, subject to statutory approvals. However, the company's plans were altered after the Union Budget 2024 did not allocate the anticipated financial support to Oil Marketing Companies (OMCs).

Backdrop of the Decision:

The Ministry of Petroleum & Natural Gas had initially proposed an allocation of ₹30,000 crore in capital support for OMCs in the 2024 Budget. However, the final Budget made no provision for these funds, making it difficult for the government to participate in IOC's rights issue.

Given that the government currently holds a 51.5% stake in Indian Oil Corporation, its non-participation prompted the IOC board to reconsider and eventually cancel the proposal.

“In view of the government’s non-participation, the board has decided to withdraw the proposed rights issue of shares,” Indian Oil Corporation mentioned in its filing.

Implications for Other Oil Marketing Companies:

This development has also shifted the focus onto Bharat Petroleum Corporation Ltd. (BPCL), which recently received approval from its board to raise ₹18,000 crore via a rights issue. Market watchers are keen to see whether BPCL will follow in IOC’s footsteps or proceed with its capital-raising plan.

Impact of Potential Fuel Price Cuts:

The rights issue cancellation comes at a time when OMCs are facing potential fuel price cuts, which could further pressure their financials. According to a recent report by BoFA Securities, OMCs could experience significant EPS reductions if fuel prices are cut:

• Hindustan Petroleum Corporation Ltd. (HPCL) could see a 36% impact on its FY25 consolidated Earnings Per Share (EPS) from a ₹1 per litre cut in both petrol and diesel prices.
• Bharat Petroleum (BPCL) could face a 26% impact.
• Indian Oil (IOC) would see its EPS shrink by 21% in a similar scenario.

The firm also highlighted concerns around negative LPG marketing margins and weak Gross Refining Margins (GRMs), which continue to challenge the sector's profitability.

Stock Market Reaction:

Despite the announcement, shares of Indian Oil Corporation recovered from their early losses and ended 0.2% higher at ₹180.4 on the NSE. While the stock has been relatively flat over the last month, it has posted a strong 40% rise so far in 2024, reflecting investor confidence amid volatile market conditions.

Key Takeaways:

1. IOC Withdraws ₹22,000 Crore Rights Issue: Due to the government's non-participation, IOC has canceled its fundraising plan.
2. Impact of Union Budget 2024: No capital support was provided to OMCs, affecting their ability to proceed with rights issues.
3. Focus Shifts to BPCL: BPCL, which has a ₹18,000 crore rights issue approved, is under scrutiny.
4. Potential Fuel Price Cuts: OMCs face significant financial impacts if fuel prices are reduced, as highlighted by BoFA Securities.
5. Market Response: IOC shares ended 0.2% higher post-announcement, maintaining a strong performance in 2024.

This decision by Indian Oil Corporation signals a cautious approach to fundraising amidst uncertain market conditions and regulatory shifts, leaving the industry and investors watching closely for the next move by BPCL and other OMCs.