Sreeja Biswas | December 2, 2022
Windfall tax hike to restrict oil price realisation at $75 per barrel
Indian oil companies’ profit may slump in the second half of the year after the government hiked windfall tax for the ninth time in November, said analysts.
The windfall tax was raised to ₹10,200 per tonne from ₹9,500 per tonne on domestic crude oil on November 17. It reduced the cost of diesel exports from ₹13.5 per litre to ₹10.5 per litre. The tax, imposed as a special additional excise duty, is reviewed every 15 days to record profit collected by domestic crude producers.
“Profit margin expansion will remain extremely difficult” for oil marketing companies (OMCs) and refining businesses, said Probal Sen, Vice President of Equity Research, ICICI Securities Ltd.
OMCs deal with retail marketing and distribution of petrochemical products, while refining companies process crude oil into various petrochemical products.The windfall tax allows refining companies to earn a gross refining margin (GRM) – a measure of economic performance – of $10-$12 per barrel, said Sen.
The November hike comes after the government windfall tax collection amounted to ₹2,500 and ₹3,000 crore in each month since July when it first imposed the tax.
The government should allow the OMCs to profit from their higher margins to reduce the companies’ deficit, said Kirtan Mehta, Equity Research Analyst, BOB Capital Markets Ltd. Otherwise, they might incur annual losses, he added. Mehta said that these taxes discourage companies from making profits on exports.The government instead favors domestic supply.
“Sales volume will remain muted,” said Mehta. The muted volumes raise the concern of whether they can keep up with their anticipated structural growth in the third quarter, he said.
“The windfall tax hike will restrict their oil price realisation at $74-$75 per barrel, compared to $65-$70 last year” said Varatharajan Sivasankaran, President, Antique Stock Broking Ltd. This is enough for the companies to cover their capital expenditure requirements, he said. Oil realisation refers to the price received for the oil sold from a given lease.
For the September quarter of fiscal 23, Bharat Petroleum Corporation (BPCL) posted a net loss of Rs338.5 crore, Hin- dustan Petroleum Corporation (HPCL) on the other hand, logged a net loss of Rs2,172 crore, Indian Oil Corporation (IOC) reported a net loss of Rs272 crore and Reliance Indus- tries Ltd. (RIL) net profit rose marginally by 0.2%.
Queries sent to Oil and Natural Gas Corporation, Reliance Industries Ltd., and Bharat Petroleum Corporation Ltd. were unanswered till the press time.
The Bombay Stock Ex- change (BSE) Oil & Gas index fell by 0.52 % to 20502.4 point. The benchmark crude oil price strengthened marginally by 0.01% to $81.2 on December 2, 2022.