Windfall taxes won't take the wind off Reliance's earnings say experts

Windfall taxes won't take the wind off Reliance's earnings say experts
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The special additional excise duty on exports of crude, petrol, diesel, and aviation turbine fuel announced by the Central government recently will not have any major impact on Reliance Industries Ltd (RIL), said experts.

The experts also said the additional duties will more than compensate the government which had cut the excise duty on petrol and diesel in May.

"With fuel export tax for refiners being reviewed every fortnight, we see limited impact on RIL's earnings, with above mid-cycle margins achievable despite the tax. However, stock implies cap at single-digit margins," said Morgan Stanley in a research report.

The Centre announced the levy of additional excise duty/cess of Rs 6/litre on petrol and Rs 13/litre on diesel exports.

The government also announced the levy of additional excise duty/cess of Rs 23,250/tonne on crude oil as special additional excise duty, since domestic crude producers sell to domestic refineries at international parity prices, and as a result, are making windfall gains.


Similarly in the case of aviation turbine fuel (ATF) exports, a special additional excise duty of Rs 6/litre was announced.

While crude prices have increased sharply in recent months, the prices of diesel and petrol have shown a sharper increase, the government had said.

The refiners export these products at globally prevailing prices, which are very high. As exports are becoming highly remunerative, it has been seen that certain refiners are drying out their pumps in the domestic market, the government had said.

According to the Morgan Stanley report, the government regulations implies a permanent $6-7/bbl (barrel of crude oil) lower refinery margin for RIL.

"With the government looking to review the tax every fortnight, RIL can sustain refinery margins at $15/bbl or above despite the tax as refining markets remain very tight."

Even a $15/bbl gross refinery margin (GRM) would imply earnings upgrades and not downgrades to Street estimates, says Morgan Stanley.

However, the tax does affect multiples considering RIL had not seen government interference in the oil-to-chemical (O2C) Ain the past, it added.

In its research report, Credit Suisse said the blended impact on RIL from cess on export of petroleum products is about $7-8/bbl, translating to an annualised impact of $3.5-4.0bn on EBITDA.

"The key thing to note here is that this impact is not on base profits but is on the excess profits, as current refining margins are very high. In our interaction with investors, the key questions were around the duration of applicability of this cess and the time lag impact on RIL, if refining cracks were to correct but the cess continues for a quarter or two," Credit Suisse said.

According to Credit Suisse, RIL was generating mid-cycle GRM of $8-9/bbl. Hence, it needs refining margins to sustain at at-least $17-18/bbl for minimal impact on the base business profitability (current GRM is high at $30/bbl+, thus, the buffer is still high).

The recent cess on export of petroleum products will more than compensate the Central government that cut the excise duty on petrol by Rs 8/litre and on diesel by Rs 6/litre in May 2022, Credit Suisee said.

The excise duty cut had impacted the government's tax revenue by Rs 1 trillion on an annualised basis.

"As per today's notification, it imposed duty on domestically produced crude (by $40/bbl.) and on export of petrol, diesel and ATF (cess of Rs 13/litre on diesel and Rs 6/itre each on petrol and ATF). This can possibly fetch about Rs 1.4 trillion on annualized basis for the government," Credit Suisse said.

The key question for oil marketing companies (OMC) is if the government will use part of this gain to compensate for loss in the marketing segment.

The key variable here is sustenance of high refining margins (if crude prices drop, then the marketing losses for OMCs would drop too), Credit Suisse report said.

In its report J.P. Morgan said the windfall fuel taxes adds regulatory risks to the market.

The government's measures on oil/gold taxes could create a minor 'China-style' regulatory overhang on Indian equities, J.P. Morgan said.

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