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Windfall tax: Morgan Stanley says ONGC to be bruised but RIL is better placed – Moneycontrol

The government earlier in the day imposed a Rs 6 per litre tax on exports of petrol and jet fuel and Rs 13 per litre on exports of diesel. It also announced a cess of Rs 23,250 per tonne on locally produced crude oil.

Morgan Stanley believes the windfall tax on “extraordinary” profits from the export of petroleum products will leave ONGC battered while Reliance Industries can manage the changes in a better way.

The government earlier in the day imposed a Rs 6 per litre tax on exports of petrol and jet fuel and Rs 13 per litre on exports of diesel. It also announced a cess of Rs 23,250 per tonne on locally produced crude oil.

“Export taxes/restrictions and windfall taxes on oil producers are a global trend and highlight the tightening energy market outlook. India’s announcement is incrementally negative for sector valuations,” said Mayank Maheshwari, an analyst with Morgan Stanley.

The rationale behind the government’s decision to impose a windfall tax is that oil companies are reaping huge profits due to high international prices of crude oil as well as finished products. And, this gives them a reason not to apply fuel domestically. Hence, taxes have been imposed to deter the practice.

The government has also put some export restrictions. It said the exporters would be required to declare at the time of exports that 50 percent of the quantity mentioned in the shipping bill has been/will be supplied in the domestic market during the current FY. This; however, does not apply to special economic zone (SEZ) refiners like Reliance Industries.

Morgan Stanley said the higher cess on domestic crude production of ONGC and Oil India (OIL) was a negative surprise and should imply downside risks for the sector multiple over the medium term. It impacts ONGC and OIL earnings for FY23 by 36 percent and 24 percent, respectively, it added.

Shares of ONGC and Oil India – which were outperforming the market this year so far – were down 14 and 15 percent, respectively, over the previous day after the announcement. Vedanta, which has oil rigs under Cairns Oil & Gas, was also down 4 percent.

However, the biggest impact on the market was from a 7 percent drop in Reliance Industries (RIL). It has one of the highest weights in Nifty and was single-handedly responsible for headline indices being in the red on Friday.

“Assuming the full impact of the regulations on both diesel and gasoline, RIL’s gross refining margins (GRM) would be negatively impacted by $6-8/bbl (barrel) realistically versus last week’s margin of $24-26/bbl. This would still be above our base case estimates on earnings. Every $1/bbl impacts RIL’s earnings by 2.5-3 per cent,” said Maheshwari.

Maheshwari added that most other refiners largely sell locally and the impact on earnings will be limited.

Disclaimer: Moneycontrol is a part of the Network18 group. Network18 is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary.