ONGC, Indian Oil and Gujarat Gas shares slip as windfall gains tax unlikely to be relaxed soon

Shares of oil and gas companies traded mixed on Friday, a day after sources told CNBC-TV18 that the windfall tax on O&G firms, introduced on July 1, is unlikely to be relaxed soon in the first review meeting on July 15.

Following the development, stocks of most oil and gas firms including Indian Oil Corporation, Oil and Natural Gas Corporation (ONGC), Gujarat Gas, Bharat Petroleum Corporation Limited (BPCL) and Indraprastha Gas Limited were in the red territory.

However, Oil India, GAIL, Reliance and Petronet maintained their spots in the green. The sectoral index S&P BSE OIL & GAS declined 0.3 percent in intraday trade.

Sources have told CNBC-TV18, Centre is closely monitoring the volatility in the international oil market and will see the price trend before revising the current windfall gain levies.

A windfall tax is a higher tax rate on sudden big profits levied on a particular company or industry.

The government has imposed a Rs 6 per litre tax on the export of petrol and aviation turbine fuel (ATF) and a Rs 13 per litre tax on the export of diesel. It also levied a Rs 23,250 per tonne additional tax on crude oil produced domestically.

The export tax follows oil refiners making a killing in exporting fuel to deficit regions such as Europe in the aftermath of Russia's invasion of Ukraine. Reports have earlier indicated that several oil companies processed Russian crude oil available at a discount after it was shunned by the West and exported fuel produced from it.

Earlier this week, brokerages turned cautious O&G stocks being wary of the impact the windfall tax. Global brokerage Morgan Stanley said ONGC was most negatively impacted, while Reliance Industries shall deal with the challenges in a better manner.

“Higher cess on domestic crude production of $40per barrel for ONGC and OIL was a negative surprise and should imply downside risks for the sector multiple over the medium term. It impacts ONGC and OIL earnings for F23 by 36 percent and 24 percent,” the brokerage said.

JPMorgan has also downgraded its rating on ONGC shares to ‘neutral’ and slashed its target price to Rs 155 from Rs 210. It believes the imposition of a large fixed additional tax of $40 per barrel is sharply negative.

JPMorgan also trimmed its earnings per share (EPS) estimates for FY23 by 32 percent and by 26 percent for FY24. The brokerage firm added that there was no clarity on when the tax would be removed.

Goldman Sachs also cut its EPS estimates for FY23 and FY24 by 23 percent, slashing the target price on ONGC to Rs 210 from Rs 285.

The brokerage firm said that though the windfall tax was a surprise, the risk-reward ratio remains favourable. Goldman Sachs has a ‘buy’ call on ONGC’s stock and still sees 21 percent free cash flow and 11 percent dividend yield in FY24.

Besides, Emkay Global Financial Services said that capping export gains, in addition to the domestic price freeze, is also a negative signal.