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Trust has to pay £6 a liter of petrol and £13 for diesel exported as a tax, but rising margins may dampen this

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  • The Indian government last week imposed two different taxes on oil refineries and crude oil producers.
  • This tax impacts Reliance Industries the most, as it is the largest exporter of gasoline and diesel, and much of its profits come from its oil and chemicals business.
  • However, Moody’s believes that this tax will not affect Reliance’s credit quality. However, brokers believe there would be some impact on the valuation along with ONGC and Oil India.
  • While international gross refining margins are high this month, any correction could have a material impact on all refiners planning to export.

India’s new unadulterated taxes on energy companies will see export-oriented oil refineries such as Reliance Industries Ltd (RIL) refund as much as ₹6 per liter of petrol and ₹13 per liter of diesel exported to the government.

“The increase in government taxes will limit the profit benefit to RIL’s exports, but will not materially affect its solid credit quality and excellent liquidity. RIL is the largest exporter of petroleum products from India,” said a Moody’s report.

In the fiscal year ending March 2022, the telecom retail oil giant generated about 41% of its consolidated pre-tax profits from its oil-to-chemicals business.

Refineries could also be supported by an unusual increase in gross refining margins thanks to the massive change in supply chain dynamics after the Russia-Ukraine war. Aside from the sudden surge in fuel demand around the world after the pandemic, China has also curtailed its exports and EU sanctions have changed the way oil flows.

According to a report by Yes Securities, refining margins in Singapore, a benchmark, nearly doubled to $40/bbl for gasoline in June and $62/barrel for gas oil cracks in early July. This provides support to Indian refineries, which can benefit from this trend despite the new tax.

The new taxes announced by the Treasury Department last week are also collecting windfalls from crude oil explorers such as ONGC, Oil India and more. But they won’t be too bothered by it, according to the rating agency.

“Raising taxes on crude oil production will reduce ONGC’s margins, but this is mitigated by the company’s current high oil prices and low production costs,” Moody’s said.

No benefit for ONGC above $80 per barrel

However, ONGC’s stock has been weighed down by fears of such a tax for some time. And many brokers believe that it will lower it.

“The recent windfall tax indicates that the government would not allow ONGC to earn more than $80/barrel, while there is no government support for ONGC if the price of crude oil falls below $50/barrel,” said an Elara report. capital.

The brokerage also cut another state oil company, Oil India, as half of this explorer and refiner’s revenue comes from its Numaligarh refinery. It also expects to impact Reliance.

“We believe that a correction of approximately 8% on Reliance shares versus Sensex at 4% in the past month is mainly due to the negative impact on earnings, due to export duties. But, as in the case of upstream companies, concerns could arise about Reliance if gross refining margins collapse while export duties on petrol and diesel remain,” Elara said.

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