Reliance Industries in focus as benchmark refining margin slips

Stock falls a day after windfall tax cut; crude refiner's results today

The benchmark of profitability for crude oil refiners has fallen sharply in the past few weeks, bringing oil companies like Reliance Industries (RIL) into sharp focus. The Singapore-Dubai hydrocracking refining margin has fallen 57 per cent in the past month, on the back of demand concerns triggered by recession fears globally. It now hovers over $16.24 per barrel, according to the Bloomberg data compiled by BS Research.

The fall is likely to hurt RIL, among other refiners, as it processes crude oil into refined products, said sector analysts. On Thursday, Brent crude touched $105.8 per barrel, down 3.2 per cent over the previous day’s close. The benchmark has remained largely volatile through the week after falling below $100 per barrel last week.

RIL is set to report its first-quarter results on Friday.

On Thursday, the RIL stock closed trade down 0.6 per cent over the previous day’s close on the BSE at Rs 2,487.4 per share. This came a day after a cut in the windfall tax announced by the government, which had lifted all oil stocks, including RIL’s. Among other losers on Thursday were Chennai Petroleum Corporation, which was down 3.6 per cent over the previous day’s close at Rs 275.4 a share; Mangalore Refinery and Petrochemicals, down 3.7 per cent over Wednesday’s close at Rs 73.5 a share; and Hindustan Oil Exploration Company, down 1.8 per cent over Wednesday’s close at Rs 170.9 per share. Among the gainers were Oil India (OIL) and Oil and Natural Gas Corporation (ONGC), which were up 1.8 per cent and 0.3 per cent, respectively, over the previous day’s close at Rs 201 and Rs 133 per share, respectively. Hindustan Petroleum Corporation and Indian Oil Corporation also closed in the green, at Rs 237.7 and Rs 72.6 per share, respectively, on the BSE — up 1.5 per cent and 0.4 per cent, respectively, over Wednesday’s close.

The S&P BSE Sensex and the BSE Oil & Gas Index close trade on Thursday at 55,682 points and 18,580.9 points, respectively — up 0.5 per cent and 1.3 per cent, respectively, over the previous day’s close. Analysts remain bullish on RIL’s April-June performance, led by a leg-up from its oil refining business.

“The April-June of 2022-23 will be significantly influenced by higher gross refining margins the company saw during the quarter due to spike in crude prices, as well as the refining boom due to the Russia-Ukraine stand-off,” says Deven Choksey, managing director at Mumbai-based brokerage KRChoksey.

While there has been correction both in benchmark refining margins, as well as benchmark crude price, brokerages like Morgan Stanley say that RIL, ONGC, and OIL will be key beneficiaries of the reversal in windfall taxes.

“India’s Ministry of Finance has announced an unwinding of windfall taxes on fuel exports and oil a lot quicker than anticipated. While in absolute terms the windfall taxes are still high, we believe the steady normalisation in local fuel availability, stability in oil prices, and global fuel margins, as well as currency stability, will help further reduction in windfall taxes in the future,” the brokerage said.

Morgan Stanley also said that RIL, OIL, and ONGC will see a reduction in overhang as a result of the tax cut. Their equity valuations will eventually start pricing in high sustainable energy margins as windfall taxes were cut further by the government.

“We believe RIL should get priced at $13-15 per barrel sustainable refinery margins, while ONGC will get priced at $75-80 per barrel oil and $6 metric million British thermal units. The two should imply a 25-40 per cent upside to equities as energy markets are expected to remain tight despite the current volatility in oil and reduction in global fuel margins from peak levels,” observed the brokerage.