Excise duty on upstream, export of transportation fuels may not impact our FY23 earnings forecasts for ONGC, RIL significantly: IIFL Capital Services

Tough times, desperate measures

The government’s policy of taxing refiners and upstream players is intended towards: 1) enforcing the USO mandate; 2) capping super-normal gains by E&P companies and refiners exporting products versus domestic sales, at a time when downstream players are incurring losses. The government may earn additional ~Rs1 trillion revenues if levy of duty continues till March 2023 (it will review the situation periodically). Utilization of these funds is not clear and, to that extent, the government through such a move, may have responded to the pressure on banning cheap Russian oil imports.

No major impact on earnings

IIFL Capital Services’ FY23 earnings estimates reflected a GRM of US$10-11/barrel in case of RIL, and US$90/barrel oil for ONGC and Oil India − in so far, the earnings impact may not be material if these measures continue until the second half. Accordingly, analysts at IIFL Capital Services have maintained their forecast and look forward to tweak it, if needed, in the second half. Investors would now keenly watch if the government allows upward revision in the APM/HPHT gas prices, due in the second half of FY23, or caps it, as has been the case for oil.

Policy addressing OMC hardship may be next

Oil Marketing Companies (OMCs) are incurring ~Rs15/liter loss on auto fuels, and analysts at IIFL Capital Services think the government may formulate a policy to address such hardships sometime soon. Cut in excise duty, changes in refinery transfer price, utilization of funds mobilized from above measures are some possible alternatives.

Regardless, valuations across are cheap. RIL seems to be better placed, given its integrated R-P complex, rising E&P production, and ramp up at Jio and Retail. Analysts at IIFL Capital Services like the stock, but note there is no immediate trigger.