ONGC and Reliance to Roar After Windfall Tax Cut: Morgan Stanley


A shock minimize in extra taxes imposed on gasoline exports and crude oil manufacturing has spiked power sector prospects, mentioned international brokerage Morgan Stanley.

“A quicker than expected restart to reverse the windfall taxes on the sector should normalize equity multiples steadily higher. While windfall taxes are not yet zero, we believe government action provides clarity on the path ahead. Reliance Industries, ONGC, and Oil India are key beneficiaries,” mentioned Mayank Maheshwari, fairness analyst at Morgan Stanley.

There had been talks of the federal government contemplating lowering or eliminating taxes however not many anticipated it could come this quickly. The shock transfer had the inventory market opening with positive aspects on July 20.

At the opening, BSE flagship Sensex jumped 587 factors or 1.07 per cent to 55,355 pushed by over two % bounce in Reliance and a few heavy shopping for in large-cap IT names. ONGC was up 5 %, Oil India seven %, Mangalore Refinery 5 % and Chennai Petroleum over eight %.

The Center diminished the windfall tax on diesel and aviation gasoline shipments by Rs 2 per liter and scrapped a Rs 6 per liter levy on gasoline exports. It additionally minimize the tax on domestically produced crude by about 27 % to Rs 17,000 a tonne.

“While in absolute terms the windfall taxes are still high, we believe steady normalization in local fuel availability (a key energy security concern for the government), stability in oil prices, more normalized global fuel margins, and currency stability will help further reduction in windfall
taxes under fortnightly review,” mentioned Maheshwari.

The taxes had been imposed to get a pie of windfall positive aspects that oil corporations had been making on account of excessive worldwide costs of crude oil and oil derivatives. Refining margins of some corporations had reached file excessive.

Now that taxes have been partly rationalised, Reliance, Oil India, and ONGC will see a discount in overhang and fairness valuations ought to begin pricing in excessive sustainable power margins as the federal government intent will get clear, mentioned Maheshwari. The tax minimize additionally lowers investor issues on a possible downgrade cycle for the shares in a recessionary demand surroundings.

“We imagine Reliance ought to get priced at $13-15 per barrel (bbl) sustainable refinery margins whereas ONGC will get priced at $75-80 per bbl oil and $6 per mmbtu commodity deck. The two ought to suggest 25-40 % upside to equities as power markets are anticipated to stay tight regardless of the present volatility in oil and discount in international gasoline margins from peak ranges,” he added.

Morgan Stanley estimates present gross refining margins for Reliance at $13 per bbl. ONGC, it estimates, is seeing revenue per bbl at $25, 20 % above final 12 months’s ranges.

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