Gone with the windfall tax: ONGC loses a fifth of its market value

Gone with the windfall tax: ONGC loses a fifth of its market value
ONGC is a state-run oil and natural gas explorerCanva
  • The state-run ONGC saw its value decline by over 20% in just one week.
  • This was a direct result of the government imposing a windfall tax to cap earnings of oil companies, and also prevent domestic petrol pumps from drying out.
  • Analysts say the outlook for the September quarter remains dim and earnings visibility is ‘poor’ for the sector.
State-run oil and natural gas explorer ONGC lost a fifth of its value in just a week after the Indian government announced the much-fear windfall tax on petrol and diesel sales.

This, with an export tax on refiners, can add as much as $12 billion to the government kitty according to Moody’s. As much as half this came from oil major ONGC, who lost as much as $5 billion in market value, as the tax will eat into its revenues.

It’s not the windfall tax but also the windfall itself might be slower in the coming months.

“We have seen further sharp fall in oil prices in the last few days and now concern is that this windfall tax may hurt the earnings in the second quarter if they remain as is,” Ashutosh Mishra, head of research, institutional equity at Ashika Group told Business Insider India.

This sent the markets into a tizzy, and shares of oil companies cracked. ONGC was amongst the most impacted, losing over a fifth of its value in the last seven days.


Gone with the windfall tax: ONGC loses a fifth of its market value
ONGC share price since AprilBSE / Business Insider India / Flourish

Understanding windfall tax – the why, who and what of it

Windfall tax has been implemented to cap the extra earnings that oil companies have made out of exports of petrol and diesel, thanks to the unprecedented rise in crude oil prices. The government wants to mop up these earnings to use it to cross-subsidize its shortfall from excise duty cuts on petrol and diesel announced in May.

The impact of the government’s additional levies is so bad that analysts at HDFC Securities think that ONGC’s earnings for the full year FY23 could decline by 14%.It also cut ONGC’s target price by 16%.

This is in spite of the fact that the stock has been pricing in a possible windfall tax and brokerages have been concerned about the the quality of its ageing assets. Last month, JM Financial analysts cut ONGC’s FY23 and FY24 net profit estimates by 8% and 4% respectively to account for dry wells alone.

On the other hand, analysts at IIFL Securities maintained that this won’t have a material impact on ONGC’s earnings, but they also said that the earnings visibility remains ‘poor’ for the oil sector as a whole.

BrokerageRecommendationTarget priceUpside/downside
HDFC SecuritiesBuy₹18450%
Emkay GlobalBuy₹18550%

Cool down in crude oil prices also removes arbitrage opportunity for ONGC

Another factor weighing down ONGC’s share price is the fact that crude oil prices are cooling down now, on recession fears.

From the peak of $127 in March this year, Brent crude is down to $101 now. It also fell below $100 per barrel for the first time in nearly three months, suggesting that the pressures will ease going forward.

On the other side, the US and EU contemplating a price cap on Russian oil between $40-60 a barrel could result in prolonging and worsening this crisis – but might also have a material impact on the prices of the world’s most traded commodity.

So this cool off will impact the ONGC and the entity which wants to swipe off much of its windfall gains – the Indian government.


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