Despite windfall tax, brokerages remain bullish on oil & gas stocks; see up to 70% upside on ONGC, Oil India

After the government announced export restrictions and imposed additional excise duty on petroleum products, brokerages feel oil production may hit upstream companies by under-realization. However, they also see it not impacting their FY 23 earnings forecast much.  

The government has restricted exports of diesel and petrol stating that 50% of what is exported, must be sold in India. Besides, the export of petrol and ATF will now attract an additional charge of Rs 6 per litre and a duty of Rs 13 a litre has been levied on diesel.  

The Government’s policy of taxing refiners and upstream players is intended towards enforcing the USO mandate and capping super-normal gains by E&P companies and refiners exporting products vs domestic sales, at a time when downstream players are incurring losses, says IIFL Securities. 

It feels the decision may help the government earn additional ~Rs1trn revenues if levy of duty continues till March 23.  

"Utilisation 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," it pointed out.  

However, it is of the view that the policy to levy excise duty on upstream companies and export of transportation fuels may not have a material impact on our FY23ii earnings forecasts for ONGC/RIL, given conservative assumptions for oil/GRMs, respectively. 

After the windfall tax Motilal Oswal, cut the realizations for the companies ONGC and Oil India.  

Brokerage house maintained a buy call on ONGC with a target price of Rs 171, an upside of 30.5% on Friday's closing price of Rs 131.15 per share. Similarly, the brokerage pegs upside of 70.13% for Oil India on Jul1 I closing price of Rs 213.95 per share.  

"Now that the clarity has emerged on windfall taxation, we cut the realizations for the companies keeping our multiples unchanged at 3.5x/5.9x, for ONGC/Oil India, respectively. We reiterate our BUY rating with revised target prices of Rs171 and Rs 364 for ONGC and Oil India, respectively," it said.  

Reasons for windfall tax on oil & gas companies 

Earlier, the government on Friday imposed a Rs 66,000 crore windfall tax on crude oil produced locally. The windfall tax on oil producers was triggered by Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) reporting bumper profits in the March quarter (when international prices soared to a near 14-year high of USD 139 per barrel) and record earnings in 2021-22. 

Finance Minister Nirmala Sitharaman said “phenomenal profits” earned from abnormal prices that refiners earned from shipping overseas led to the new taxes.  

“We don’t grudge people earning profits,” she said. “But if oil is not being available (at petrol pumps) and they are being exported… exported with such phenomenal profits. We need at least some of it for our own citizens and that is why we have taken this twin-pronged approach.” “It is not to discourage exports, it is not to discourage India as a refining hub. It is certainly not against profit earning, but extraordinary times do require some such steps,” Sitharaman said. 

Meanwhile, reacting to windfall tax, Oil India and ONGC shares over six per cent and nearly four per cent to Rs 201 per share and Rs 126.15 apiece on the BSE on Monday.