ONGC, Oil India extend fall; tank up to 20% in two days on windfall tax

Brokerage firm Motilal Oswal reiterates its BUY rating with revised target prices of Rs 171 and Rs 364 for ONGC and Oil India, respectively.

Shares of state-owned upstream oil & gas companies, Oil and Natural Gas Corporation (ONGC) and Oil India were down for the second straight day, falling up to 6 per cent on the BSE in Monday’s intra-day trade after the government on Friday imposed a special additional excise duty of Rs 23,250 per tonne on crude oil production.

In the past two trading days, the stock of Oil India has slipped 20 per cent, while ONGC dipped 18 per cent. In comparison, the S&P BSE Sensex gained 0.1 per cent during the same period.

The government announced export taxes and imposed restrictions on exports of petrol, diesel and aviation turbine fuel (ATF) in order to secure supplies of these products domestically at a time when exports are becoming highly remunerative. Similarly, given the sharp surge in oil prices, the government also levied a special additional excise duty (SAED) on production of crude oil.

The tax on crude oil producers like ONGC, Oil India and Vedanta alone will fetch the government Rs 69,000 crore annually considering 29.7 million tonnes of oil production in 2021-22 fiscal (April 2021 to March 2022), the PTI reported quoting two sources with knowledge of the calculations. CLICK HERE FOR FULL REPORT

Analysts at Motilal Oswal Financial Services cut the realizations of ONGC and Oil India to $60/bbl each for 2Q-3QFY23 and left the same unchanged for 4QFY23 onwards. “We also assume that the royalty and cess would be calculated on the realized price and the benchmark. At $100/bbl, these two would be equivalent to the additional reduction in realization by $12/bbl. As a result, we cut our EPS of ONGC/ Oil India by 29 per cent/25 per cent for FY23E, respectively,” the brokerage firm said in oil & gas sector update.

However, the brokerage firm reiterates its BUY rating with revised target prices of Rs 171 and Rs 364 for ONGC and Oil India, respectively. Key risk remains continuation of the windfall tax even if oil price falls below $100/bbl, it said.

“For ONGC and OIL, we bake in a lower net crude oil price realisation of USD 80/70 per bbl (net of the new SAED) vs USD 93/79 per bbl earlier for FY23/24E, to factor in the USD 30/40 per bbl impact of SAED for FY23/24E. However, the duration of these taxes is unclear,” analysts at HDFC Securities said in its sector update.

“We understand that these additional levies would be reviewed every 15 days, giving rise to optimism that these levies will be reduced/ withdrawn as inflation gets under control and/or petroleum product prices decline,” the brokerage firm said.