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  5. Reliance has to pay ₹6 per litre of petrol & ₹13 for diesel exported as tax — but rising margins may cushion it

Reliance has to pay ₹6 per litre of petrol & ₹13 for diesel exported as tax — but rising margins may cushion it

Reliance has to pay ₹6 per litre of petrol & ₹13 for diesel exported as tax — but rising margins may cushion it

  • The Indian government levied two different taxes on oil refiners and crude oil producers last week.
  • This tax impacts Reliance Industries the most as it is the largest exporter of petrol and diesel, and a large chunk of its profits come from the oil and chemicals business.
  • Moody’s, however, believes that this tax will not affect the credit quality of Reliance. However, brokerages believe that there would be some impact on its valuation, along with ONGC and Oil India.
  • While the international gross refining margins are high this month, any correction could materially impact all refiners who intend to export.
India’s new windfall taxes on energy companies will see export-oriented oil refiners like Reliance Industries Ltd (RIL) paying back as much as ₹6 per litre of petrol and ₹13 per litre of diesel exported, to the government.

“The increase in government taxes will limit the earnings upside for RIL's exports, but will not materially affect its solid credit quality and excellent liquidity. RIL is the largest exporter of petroleum products from India,” said a report by Moody’s.

In the fiscal year ended March 2022, the telecom-retail-oil giant generated about 41% of consolidated pre-tax profits from its oil-to-chemicals business.

Refiners too could be supported by an unusual increase in gross refining margins thanks to the massive change in supply chain dynamics after the Russia-Ukraine war. Apart from the sudden surge in fuel demand across the world after the pandemic, China too has limited its exports and EU sanctions have changed the way oil flows.

In June, refining margins in Singapore, which are a benchmark, almost doubled to $40/bbl for gasoline and $62/bbl for gasoil cracks in early July, according to a report by Yes Securities. This offers cushion to Indian refiners, who stand to gain from this trend in spite of the new tax.

The new taxes announced by the finance ministry last week also collects back windfall gains of crude oil explorers like ONGC, Oil India and more. But they won’t be burdened too much by it, according to the rating agency.

“The increase in taxes on crude oil production will reduce ONGC's margins, but this is mitigated by current high oil prices and the company's low cost of production,” Moody’s said.

No upside for ONGC beyond $80 per barrel
However, ONGC’s stock has been burdened with the fear of such a tax for a long time now. And many brokerages believe that it will derate it.

“The recent windfall tax indicates the government would not allow ONGC to earn beyond $80/bbl while there is no government support to ONGC if crude prices fall below $50/bbl,” said a report by Elara Capital.

The brokerage also derated yet another state-owned oil company Oil India as half of the earnings of this explorer and refiner comes from its Numaligarh Refinery. It expects to affect Reliance as well.

“We believe around 8% correction on Reliance stock vs the Sensex by 4% in the past one month mostly factors in the negative earnings impact, due to export duty. However, as in the case of upstream companies, concerns could emerge on Reliance if gross refining margins collapse while export duty remains on gasoline and diesel,” said Elara.

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