NEW DELHI: The government recently imposed a windfall tax on all refiners, including SEZ refineries, on the export of diesel, petrol and air turbine fuel. Besides, it also imposed a cess on domestic crude output.
Analysts said the development is a setback for refiners as they cut FY23 estimates steeply. The tax could potentially be used to offset OMC losses on auto fuel, analysts said.
The government has raised export duty on diesel by Rs 13 a litre and on petrol by Rs 6 a litre. It has also raised export duty on ATF by Re 1 per litre. The government said Indian exporters would have to sell 50 per cent of petrol in the domestic market on total shipping bill while they have to sell 30 per cent of diesel in domestic market on total shipping bill. In addition, a cess of Rs 23,250 per tonne was imposed on crude produced domestically.
Morgan Stanley said a higher cess on domestic crude production of $40 a barrel for ONGC and OIL was a negative surprise and should imply downside risks for the sector over the medium term. It impacts and Oil India earnings for F23 by 36 per cent and 24 per cent, the brokerage said.
The brokerage noted that export-oriented units like
would have to sell 30 per cent of diesel locally not to attract the tax. RIL, currently via its petrochemical, B2B and retail fuel stations, sells about 40-50 per cent of its products locally, it said.
“However, the sales are heavily naphtha weighted, and we still await details on RIL’s diesel sales locally. Assuming the full impact of the regulations on both diesel and gasoline, RIL’s GRM would be negatively impacted by $6-8 a barrel, realistically. This would still be above our base case estimates on earnings. Every $1 per barrel impacts RIL’s earnings by 2.5-3 per cent,” it said.
Overall India exported 42 per cent of its diesel and 44 per cent of its gasoline production in FY22 and 40 per cent of its diesel and 44 per cent of its gasoline production year-to-date.
“We see a mixed outcome of the government’s decision to impose additional excise duty on exports of diesel and gasoline and domestic production of ATF and crude oil. The indefinite period of the new taxes on petroleum products will create large uncertainty about government revenues and companies’ earnings. Also, the imposition of exports tax on an SEZ unit may potentially create tax uncertainty on future investments,” Kotak Institutional Equities said.
In a detailed note,
said the likely hit on ‘s gross refining margin (GRM) could be $7-8 per barrel, and the impact on Ebitda could be Rs 30,000-31,000 crore on an annualised basis. This might end the likely earnings upgrade cycle that the Street was expecting if the current high refining margin was to sustain, the brokerage said.
The government has also imposed a cess of $ 40 a barrel on domestic crude output, taking away the windfall gains made by upstream companies. This will mean ONGC and Oil India’s net crude realisation will decline to $70 per barrel against the $110 per barrel that they are currently making, it said.
“We were already factoring net crude realisation of $65 per for ONGC and Oil India for FY23 and FY24. However, this could pose a risk to earnings if the government delays reversal of this $40 per barrel cess in the event of a fall in crude price,” JM Financial said.
The brokerage noted that the government is likely to get monthly revenue of Rs 1,14,000 crore from windfall tax on oil (Rs 5,500 crore from cess on exports and Rs 5,900 crore from cess on domestic crude output.) This could potentially offset OMC’s monthly net loss of Rs 11,700 crore on the sale of petrol/diesel, it said.
said might continue to push most of the products to OMCs rather than in its retail outlets as RIL would not be able to match the under-realization of the OMCs.
“As our valuation is based on FY24, numbers of which are broadly unchanged, we continue to reiterate our BUY rating on the stock, valuing O2C at 7.5 times FY24 EV/Ebitda, digital at 19 times EV/Ebitda and core retail at 39 times FY24 EV/Ebitda. We have a target price of Rs 2,874 for RIL,” Motilal Oswal said.
In the case of ONGC and Oil India, the brokerage has cut the realisation estimate by $40 per barrel for Q2 and Q3 FY23 in its base case.
“This reduces the EPS of ONGC by 29 per cent; similarly, the EPS of Oil India gets reduced by 25 per cent for FY23E. If the cut gets extended to Q4FY23, then the EPS would amount to Rs 59.8/46.1 for ONGC/Oil India, respectively, for FY23. We have assumed that the royalty and cess would be calculated on the new realization rather than at benchmark,” Motilal Oswal said.
Emkay Global, meanwhile, said the government move seemed to have aimed at funding the under-recoveries on auto-fuels and LPG due to the prevailing price freeze.
“While the current scenario is weak for OMCs, and with the fuel deregulation aim being majorly affected, the supposed Rs 1 lakh crore fund raise implies that some respite may be underway for them. More clarity is still awaited, but we think gasoline and diesel excise cuts later (Rs 3-4/litre) and retention of OMCs’ margin seemS to be the most rational ways to address this,” Emkay said.
The brokerage said higher export parity pricing could also have a positive impact on domestic auto-fuel trade parity prices. “Hence, over half of OMCs’ under-recoveries could be theoretically funded with the additional SAED. We recall that the government had last cut Rs 8/litre and Rs6/litre on gasoline and diesel, respectively to pre-pandemic levels, and OMCs seemed to have passed on duty cut benefits to consumers,” the brokerage said.
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