Reliance Industries To See Limited Impact Of Export Duty Hike, Morgan Stanley To JPMorgan Say

India's decision to increase export duty on petroleum products will have a limited impact on Reliance Industries Ltd. even as the move implies a downside risk for the sector multiples, according to analysts.

Oil India Ltd. and Oil and Natural Gas Corp. Ltd. are likely to take a hit on earnings for fiscal 2023, according to Morgan Stanley.

The government levied an additional excise duty on export of crude and petroleum products to cater to the domestic demand as international oil prices soar globally. A special additional excise duty of Rs 5 a litre on petrol and Rs 12 a litre on diesel was levied, according to the statement.

Special additional excise duty of Rs 23,250 a tonne of petroleum crude and Rs 6 a litre of aviation turbine fuel was also levied.

The additional duty is not applicable on oil producers in special economic zones and 100% export-oriented units, according to notification by Director General of Foreign Trade.

Finance Minister Nirmala Sitharaman later said that "it's not to discourage exports, not to discourage India as a refining hub.” Supplies, she said, need to be made available to cater to the domestic market.

Following the announcement, stock prices of most of energy companies tumbled.

Here's what analysts made of hike in excise duty:

Morgan Stanley

• It impacts ONGC and Oil India earnings for FY23 by 36% and 24%.

• Higher cess on domestic crude production for ONGC and Oil India was a negative surprise. It should imply downside risks for the sector multiples over the medium term.

• Export-oriented units like RIL will have to sell 30% of diesel locally to not attract this tax.

• RIL currently, via its petrochemical, B2B and retail fuel stations, sells about 40-50% of its products locally.

• Assuming the full impact of the regulations on both diesel and gasoline, RIL's gross refining margin would be negatively impacted by $6-8 a barrel realistically vs last week's margin of $24-26 a barrel.

• This would still be above the research house's base case estimates on earnings.

• Every US$1/bbl impacts RIL's earnings by 2.5-3%

• Most other refiners largely sell locally and the impact on earnings will be limited.

Jefferies

• Maintains ‘buy' on RIL with a target price of Rs 2,950 apiece, implying a potential upside of 14%

• With 58% of RIL's refined products being exported, the blended impact for Reliance could be Rs 3.4 a litre translating to $ 7 a barrel impact on realised GRM.

• SEZ refinery of RIL constitutes 54% of overall refinery throughput and contributes more than 90% of RIL's refinery exports (58% of total refinery throughput exported).

• If SEZ refinery is exempted, impact on RIL's GRM would be $1 a barrel only, which is not material.

• It expects refining to remain strong in 2022 ,leading to significant upgrade to RIL's refining Ebitda.

• The impact on RIL's FY23 Ebitda could be limited.

JPMorgan

• Assuming export tax is applicable on RIL, its export-oriented unit would be exempt from the domestic sales requirement but will have to pay export tax of $27 a barrel on diesel and $13 a barrel on petrol.

• According to FY19 Finance Ministry data, the export-oriented unit accounts for 58% of total production and domestic refinery accounts for 42%.

• Assuming 50% of production slate is impacted with most of the impact on diesel. Implied GRM impact will be $13 a barrel.

• Every $1 a barrel GRM will impact RIL's Ebitda by $400 million.

• Found stock reactions to RIL to be excessive, given strong underlying cash flows and earnings even post export tax and continued growth in consumer business.

• Today's stock price fall is an attractive opportunity to enter.