Shares of ONGC, Oil India fire up as govt slashes windfall tax sharply

The reduction of windfall tax will reduce cess of domestic oil production companies like ONGC and Oil India.

Shares of upstream oil companies mainly Oil & Natural Gas Corporation (ONGC) and Oil India gained up to 4 per cent on the BSE in Thursday’s intra-day trade after the government cut the windfall profit tax on domestically produced crude oil from Rs 5,050 per tonne to Rs 4,350 per tonne. The additional excise duty on aviation turbine fuel (ATF) was also cut to Rs 1.5 per litre from Rs 6 per litre earlier.

Windfall tax is levied by Centre on profits made by oil producers on any price they get above the rate of $75 per barrel.

Cess has been reduced to ~$7.4/bbl from February 16 in the fifteenth review of windfall taxes. This will reduce cess of domestic oil production companies (ONGC in our coverage universe), ICICI Securities said in a note.

Following the news, shares of ONGC rallied 4 per cent to Rs 153.25 amid heavy volumes. A combined 8.1 million equity shares changed hands at the counter in first 40 minutes of trading.

Shares of Oil India were up 3 per cent at Rs 256 on the BSE. In comparison, the S&P BSE Sensex was up 0.64 per cent at 61,665.

Analysts at HDFC Securities have a 'BUY' recommendation on Oil India with a target price of Rs 280, premised on an increase in crude price realisation and an improvement in domestic gas price realisation.

Meanwhile, with increased visibility of strong realizations and production growth, analysts at Motilal Oswal Financial Services (MOFSL) reiterate their BUY rating on ONGC.

The company has already spent Rs 21,500 crore on KGDWN-98/2. Three wells are already producing 1.7mmscmd of gas. By May’23, the field is expected to produce first oil, peaking at 45kbopd in FY25. Along with that, gas production is estimated to reach a peak of 10-12mmscmd in FY25.

The Kirit Parikh recommendations render the much needed respite from low gas prices, as the average gas production cost of ONGC currently stands at ~USD3/mmBtu, with the NCV for APM gas remaining below USD3/mmBtu for 10 quarters since Nov’14, thereby generating marginal profit for ONGC, MOFSL said in Q3FY23 result update.

“By valuing the standalone business at 6x Dec’24E EPS of Rs 28.5 and adding the value of investments of Rs 28, we arrive at a target price of Rs 200, implying 36 per cent potential upside from Thursday’s closing price of Rs 148,” the brokerage firm said.