Oil stocks get a lift from cut in windfall taxes, RIL gains 2.5%

Mumbai: Shares of oil refiners and producers surged on Wednesday after the government cut windfall taxes on fuel exports due to falling global prices. Analysts said the move will provide a sentimental boost to these stocks and eases regulatory overhang. But investors are unlikely to rush to buy these stocks as policy risks persist, said analysts.

India's most valued company Reliance Industries advanced 2.5% to ₹2,501.4. ONGC ended up 4% at ₹132.55.

Chennai Petroleum Corp's shares advanced 7.3% to ₹285.65 and Mangalore Refinery ended up 5% at ₹76.30.


"There is some relief for oil refiners due to cutting of the windfall tax," said Hemang Jani, head of equity strategy, broking and distribution, Motilal Oswal Financial Services. "Because of these measures the effective impact on RIL EPS would be positive by 3.2%. In the case of ONGC it will be an increase of 2%."

The government on July 1 imposed an export tax on petrol, diesel and aviation turbine fuel (ATF) as well as a windfall tax on crude oil produced locally, sending stock prices of oil refiners and producers crashing. The moves dented market expectations of further record profits, which have been driven by elevated oil prices and a global energy deficit.

"While in absolute terms the windfall taxes are still high, we believe steady normalisation in local fuel availability, stability in oil prices, more normalised global fuel margins and currency stability, will help further reduction in windfall taxes under fortnightly review," said Morgan Stanley.

Reliance Industries is seen as one of the key beneficiaries of the reduction in windfall tax and the exemption to SEZ exports from duties.

"RIL is the key beneficiary, lowering the impact on its realised gross refining margins to around $1/barrel and allowing the SEZ refinery to participate fully in any improvement in refining margins going forward. This negates the regulatory overhang," said Jefferies.

Morgan Stanley, which has an overweight rating on RIL with a target price of ₹3,253, said the share price of the oil-to-telecom conglomerate will rise in absolute terms over the next 60 days.

"We estimate RIL's refinery margins to be averaging near US$12-13/barrel currently, which is still near peak cycle levels, despite the recent correction in refining margin," said Morgan Stanley.

CLSA said the cut in windfall tax is a 'big positive' for ONGC and OIL India.

"This cut in windfall tax clearly shows that the government is trying to ensure a post windfall tax crude price realisation of US$75-80/bbl (barrel) for Indian crude oil producers like ONGC and Oil India," the brokerage said.