RIL, BPCL, HPCL, IOC share price targets after excise duty cut on petrol, diesel; windfall tax

Motilal Oswal Financial Services Ltd (MOFSL) in a fresh note on oil & gas sector said while the recent gross refining margins (GRMs) on High Speed Diesel (HSD) have been in the $50-60 a barrel range and refiners, including Reliance Industries Ltd (RIL), are making higher profits than the pre Israel-Iran war, actual refining profitability may be lower than what headline GRMs suggest.

Following the imposition of windfall taxes on aviation fuel and diesel exports, the brokerage maintained a 'Buy' rating on RIL with a target price of Rs 1,750. It also suggested 'Buy' rating on HPCL and 'Neutral' on BPCL and IOCL following the excise duty cut.  

On March 27, the central government cut excise duty on high speed diesel and motor spirit (petrol) by Rs 10 per litre and imposed a tax of Rs 21.50 and Rs 29.50 per litre on the export of HSD and aviation turbine fuel (ATF).  
 
MOFSL said the excise duty cut on petrol and diesel should lower under-recovery for OMCs but current under-recoveries on petrol and high speed diesel (pre-excise adjustment) remain highly volatile at Rs 20-30 per litre. Even after these measures, MOFSL said OMCs continue to incur significant losses on auto-fuel retail sales.

"In addition, we estimate a further Rs 4 per litre benefit for HPCL/BPCL/IOCL due to the export tax on high-sulfur diesel (HSD),
which lowers the refinery transfer price (net benefit will accrue only on external volumes). Lastly, we see scope for a retail price increase of Rs 2-4 per litre if a low-to-moderate intensity conflict continues to simmer over the coming month," MOFSL said.

In the case of RIL, the government announced the imposition of a windfall tax on HSD/ATF exports. Assuming the tax is not applicable on RIL’s SEZ volumes -- it was applicable only for the initial fortnight post Russia-Ukraine war, MOFSL estimated an impact of $2 per barrel on overall gross refining margin (GRM).

MOFSL said RIL's refining profitability may be lower than what headline GRMs suggest due to higher fuel loss at complex refineries (2-3 per cent), translating into $2-3 per barrel impact; a sharp rise in VLCC freight costs ($2 per barrel impact; and export tax calculations are likely based on GRMs over Brent, whereas crude sourcing currently often involves paying a premium, thus overstating GRMs.

In addition, RIL has diverted propane towards LPG production, given the domestic LPG shortage and this is likely to weigh on profitability. RIL has also not implemented any retail fuel price hikes despite a sharp rise in crude prices, MOFSL noted.

"We ascribe an equity valuation of Rs 590 per share and Rs 560 per share to RIL’s stake in JPL and RRVL, respectively. We assign Rs 174 per share to the New Energy business, Rs 30 per share equity value to RCPL, and Rs 26 per share to RIL’s stake in JioStar," MOFSL said. The brokerage suggested an enterprise value of Rs 5.7 lakh crore or Rs 420 per share for the standalone business.