The government windfalls imposed on domestic crude oil production and fuel exports will weigh heavily on ONGC’s revenues, while cutting up to $12 a barrel in refining margins for Reliance Industries Ltd.
Brokers said the new levies would give the government up to Rs 1.3 lakh crore in additional revenue.
In a surprising move, on July 1, the government increased tariffs on gold (5 percent), added export duties on gasoline and ATF (Rs 6/litre; $12 a barrel) and diesel (Rs 13/litre; $26/bbl). ) and imported a windfall in domestic crude oil production (Rs 23,250 per tonne; $40/bbl).
This follows previous tariffs on steel (15 percent) and iron ore (20-45 percent).
While the export tax will apply to Reliance Industries’ export-only refinery (RIL), the restriction on product exports where at least 30-50 percent is delivered domestically first does not apply to SEZ units.
HSBC Global Research said in a note in May 2022 that the government announced a cut in excise tax of Rs 8 per liter on petrol and Rs 6 per liter on diesel, which is estimated to have cut its revenue by Rs 1 lakh crore.
“The additional excise tax announced from July 1, 2022 aims to close this revenue gap. We estimate that these taxes could generate Rs 1.2 lakh crore in government revenue and discourage the export of products derived from the domestic market. “
The windfall tax on crude oil production could generate revenues of Rs 65,600 crore and export tax another Rs 52,700 crore if continued throughout the year.
Kotak Institutional Equities said the taxes would result in additional tax revenues of Rs 1.3 lakh crore on an annual basis and Rs 1 lakh crore for the remainder of FY2023 assuming the government maintains taxes for the full year.
UBS estimated that the government could raise Rs 1.38 lakh crore annually from additional taxes.
“Based on the export volumes of diesel and petrol in the past year and an estimate for FY23, we estimate the additional revenue of Rs 68,000 crore on three transportation fuels. Similarly, windfall gains on crude oil could generate Rs 70,000 crore in additional revenue.” Nomura said the windfall tax could potentially impact RIL’s GRM by $12 per barrel (Rs 47,000 crore per year).
Goldman Sachs said it saw limited earnings risk to RIL (despite broad scenarios of $1.5-12.7 gross refining margin risk or GRMs from new taxes) as the spot implied GRM run rate is over $27 per barrel.
HSBC said that while the new tax will cut ONGC’s earnings by Rs 30 per share, the impact on RIL would be Rs 36 per share.
“We continue to believe that the loss on the domestic marketing margin is still greater than the export tax, so we believe that RIL is likely to continue to export significant quantities,” said HSBC.
JP Morgan said that while excise taxes on steel/iron ore helped lower domestic prices and curb inflation, a higher tax on gold should reduce imports and marginally help external equilibrium.
“However, the measures taken on Friday (July 1) will certainly serve to increase revenue for the government.”
Crude oil taxes should bring in an additional $3-4 billion (net of lower royalties, income taxes and dividends), while gold taxes could increase $1.5-2 billion year on year.
Export taxes on diesel/gasoline can generate nearly $9 billion gross annually; adding the revenue for the current tax will be 75 percent of these numbers.
“The government’s intent appears to maximize revenues for upstream producers by limiting their benefit from higher oil prices and discouraging the export of refined products by private refineries to ensure domestic fuel availability is not compromised,” Citi said. in a note.
The $40 per barrel windfall tax is “a material negative for ONGC, particularly where earnings are likely to be severely impacted,” it said.
On top of the new tax, ONGC will continue to pay 20 percent (one-fifth of the oil price) as an OIDB tax and an additional 10-20 percent in royalties. The net realization for ONGC will be approximately 40 percent of the oil price.
The gross refining margin (GRM) impact on RIL, assuming two-thirds of its diesel, gasoline and ATF are exported, could be $9-10 per barrel, Citi said, adding that the company currently earns $25 per barrel of GRM. .
“The profit impact for RIL will likely be less material given the mark-to-market offsets for current GRM strength, which would likely preclude earnings upgrades rather than trigger major downgrades.”
Kotak said it “doesn’t see much merit in the government’s decision to impose export duties on exports from RIL’s SEZ refinery. The export tax. However, RIL’s SEZ refinery was set up for export and its products were not intended for sales on the domestic market”.
It said supply-demand analysis of petroleum products shows that there is sufficient availability of diesel and gasoline for the domestic market, even excluding volumes from RIL’s SEZ refinery.
Haitong said the total demand for diesel in India is 80-83 million tons, while the total supply of PSU diesel is 65-68 million tons.
“Therefore, the rest can be covered by private players such as RIL and Nayara Energy. Similarly, the total gasoline consumption in India stands at 30-31 million tons, while the supply of PSUs is 21-22 million tons.
Therefore, a third of India’s consumption can be met by private players.” According to CLSA, RIL’s GRMs could be hit by the new tax at $5-6 per barrel.
It said the new taxes would give the government additional annual revenue of Rs 1.1 lakh crore ($14 billion), negating the revenue loss of Rs 97,000 crore from the tax cut about six weeks ago.
Credit Suisse said the impact on RIL of cessation on petroleum product exports is about $7-8 a barrel, translating to a $3.5-4.0 billion annual effect on EBITDA.