Windfall tax cut makes CLSA bullish on RIL, ONGC, Oil India

Global financial major CLSA believes that the government’s recent decision of cutting the windfall tax on crude oil production and also on export is a big positive for companies like Reliance Industries, ONGC and Oil India.

Earlier this week, the government announced a cut in the windfall tax on crude oil production from $40 per barrel to $29 a barrel and that on export of gasoline/diesel/ATF from $12/26/12 per barrel to nil/$22/8 a barrel.

“Reacting to the sharp fall in international crude price and product spreads, the government has cut windfall tax,” the CLSA report stated.

“Export refineries are now exempt from the windfall tax which is a big relief for Reliance… This cut clearly shows that the government is trying to ensure a minimum realisation of $75-80/bbl and should be seen as a big re-rating trigger for ONGC/Oil India,” it added further.

Windfall tax is a tax, which is typically imposed on an industry or sector when it is believed that the sector is making unusually high level of profits due to market factors, in this case, the spurt in global crude prices.

The government has clarified that export-oriented refineries fall under the ambit of Special Economic Zone (SEZ) and will be exempt from windfall taxes, which, as per CLSA, is a positive for RIL as 55 per cent of its refining production comes from its export refinery.

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The global financial major further added that the clarification along with the cut in windfall tax, would lead to RIL’s refining margin fall from $10-11 a barrel to $3-4 per barrel.

In the case of ONGC and Oil India, CLSA believes that the tax cut “clearly shows that the government is trying to ensure a post windfall tax crude price realisation of $75-80/bbl for Indian crude oil producers.”

“This action should make investors start pricing in US$75-80/bbl as the upper boundary for ONGC/Oil India. Additional positives are the stocks’ double-digit dividend yields,” stated the report.

CLSA further highlighted the fact that the government’s decision to cut windfall taxes will “challenge the impression that the government will singularly push national service for ONGC/Oil India as all actions have been taken on the whole industry which could also bridge the big discount that their multiples trade at”.