Windfall tax: $12 margin hit for Reliance; govt to rake in Rs 1.3 trn

However, the earnings impact for RIL is likely to be less material given offsets from marking-to-market for current GRM strength, says a brokerage

The windfall taxes imposed by the government on domestic crude oil production and fuel exports will hit ONGC's earnings severely while shaving off up to $12 per barrel in refining margins for Reliance Industries Ltd. The new levies will give the government up to Rs 1.3 trillion additional revenue, brokerages said.

In a surprise move, the government on July 1 increased import duties on gold (by 5 per cent), added export duties on petrol and ATF (Rs 6/litre; $12 per barrel) and diesel (Rs 13/liter; $26/bbl) and slapped a windfall tax on domestic crude production (Rs 23,250 per tonne; $40/bbl).

This follows earlier duties imposed on steel (15 per cent) and iron ore (up 20-45 per cent).

While the export tax will be applicable on only-for-exports refinery of Reliance Industries (RIL), the restriction on product exports wherein at least 30-50 per cent is first supplied domestically will not apply to SEZ units.

HSBC Global Research in a note said in May 2022, the government announced a cut in the excise duty of Rs 8 per litre on petrol and Rs 6 a litre on diesel, which is estimated to have reduced its revenues by Rs 1 trillion.

"The additional excise duty just announced and effective from July 1, 2022 aims to fill this revenue gap. We estimate these taxes could generate Rs 1.2 trillion in government revenue and could also discourage the export of products which are being diverted away from the domestic market." The windfall tax on crude production could generate revenue of Rs 65,600 crore and tax on export products another Rs 52,700 crore if they were to be continued for the full year.

Kotak Institutional Equities said the taxes will result in additional tax revenues of Rs 1.3 trillion on an annualised basis and Rs 1 trillion for the rest of FY2023 assuming the government retains the taxes for the entire year.

UBS estimated that the government can raise Rs 1.38 trillion annually from additional taxes.

"Based on diesel and gasoline export volumes in past year and estimate for FY23, we estimate additional revenues of Rs 68,000 crore on three transportation fuels. Similarly, windfall taxes on crude can raise Rs 70,000 crore in additional revenues." Nomura said the windfall taxes could potentially impact RIL's GRM by $12 per barrel (Rs 47,000 crore on an annualised basis).

Goldman Sachs said it saw limited earnings risk for RIL (despite wide scenarios of $1.5-12.7 risk to gross refining margins or GRMs from new taxes) as the spot implied GRM run rate is over $27 per barrel.

HSBC said while the new tax will lower ONGC earnings by Rs 30 per share, its impact on RIL would be Rs 36 a share.

"We continue to believe the loss on its domestic marketing margin is still greater than the export tax, and thus, we believe RIL is likely to continue to export significant amounts," HSBC said.

JP Morgan said while the duties on steel/iron ore helped reduce domestic prices and curb inflation, a higher tax on gold should decrease imports and help the external balance marginally. "Yet, Friday's (July 1) measures will serve squarely to raise revenue for the government." Duties on crude oil should raise an additional $3-4 billion (net of lower royalties, income taxes and dividends) while the gold duty can raise $1.5-2 billion annualized. Export taxes on diesel/petrol can raise close to $9 billion gross per annum, it said adding the revenue for current fiscal will be 75 per cent of these numbers.

"The government intent appears to be to maximise revenues from upstream producers by capping their upside from higher oil prices as well as disincentivising refined product exports by private refiners to ensure domestic fuel availability isn't compromised," Citi said in a note.

The $40 per barrel windfall tax is "a material negative for ONGC in particular where earnings are likely to be severely impacted," it said.

On the top of the new levy, ONGC will continue to pay oil 20 per cent (a fifth of the oil price) as OIDB cess and another 10-20 per cent royalty. The net realisation for ONGC will be around 40 per cent of the oil price.

The gross refining margin (GRM) impact for RIL assuming two-thirds of its diesel, petrol and ATF were being exported, could be $9-10 per barrel, Citi said adding the firm must be currently earning $25 per barrel GRM.

"The earnings impact for RIL is likely to be less material given offsets from marking-to-market for current GRM strength, which would likely preclude earnings upgrades rather than drive major downgrades." Kotak said it does not "see much merit in the government's decision to impose export duties on exports from RIL's SEZ refinery. The government has cited increased exports of diesel and gasoline and lower availability of such products for the domestic market as a key reason to impose the exports tax. However, RIL's SEZ refinery was set up for exports and its products were not intended for sale in the domestic market".

It said demand-supply analysis of petroleum products shows that there is enough availability of diesel and petrol for the domestic market even excluding volumes from RIL's SEZ refinery.

Haitong said India's total diesel demand is 80-83 million tonnes while the total PSU diesel supply is 65-68 million tonnes.

"Therefore, the rest can be met by private players like RIL and Nayara Energy. Similarly, total consumption of petrol in India stands at 30-31 million tonnes while PSUs supply is 21-22 million tonnes. Therefore, one-third of India's consumption can be fulfilled through private players." According to CLSA, RIL's GRMs may be hit by $5-6 per barrel due to the new tax.

It said the new taxes would give the government extra annual revenue of Rs 1.1 trillion ($14 billion), negating the Rs 97,000 crore revenue loss from the excise duty cut done about six weeks ago.

Credit Suisse said the impact on RIL from cess on the export of petroleum products is about $7-8 per barrel, translating to an annualised impact of $3.5-4.0 billion on EBITDA.

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