Reliance, ONGC and Indian Oil shares fall as Street treads cautiously on windfall tax revision

Shares of oil and gas producers and explorers, including Oil and Natural Gas Corporation (ONGC), Vedanta, and Indian Oil Corporation, traded in the red territory in early deals after the increased levy on domestically produced crude oil, which is in line with a marginal increase in international crude prices.

Shares of oil marketing companies (OMCs) too declined in the range of 0.8 to 1.7 percent.

This downward trend in the sector comes on a day when oil prices globally have fallen a percent in early trade before paring some losses, ahead of a meeting OPEC+ producers on fears of a slowdown in global growth hitting fuel demand and a firmer dollar.

Brent crude futures were last down 38 cents, or 0.4 percent, at $100.16 a barrel this morning. West Texas Intermediate (WTI) crude futures slid 35 cents, or 0.4 percent to $94.07 a barrel.

Prashanth Tapse, Sr VP Research (Research Analyst), Mehta Equities Ltd. said the revised move would hit crude producers ONGC and OIL and this would indicate downside risks for the sector over the medium term depending on the crude.

"The impacts of revised tax would affect the earnings of O&G stocks by 8-10 percent for F23e, if crude remains under $100. Such a government action would create large uncertainty about companies’ earnings that need to be watched," he told CNBCTV18.com.

According to him, the increased export duty on domestically produced crude oil can be assumed as temporary raise in the cost of production affecting margins. The outlook remains neutral to negative for the sector over the medium term, he said.

Also, he is of the view that the cut in duty on diesel and jet fuel is a very negligible relief and hence, the stocks are under pressure.

Sumit Pokharna, Research Analyst, Vice President - Kotak Securities Ltd believes the export tax on diesel may also be phased out soon. With the reduction in export tax, the impact on overall India refinery margins will now reduce to $0.9 per barrel (from earlier US$2/bbl), according to his firm's estimates. This is positive for all independent refiners, and negative for OMCs, he said.

However, he thinks the tax on crude oil may sustain for a longer period, and it may be phased out completely only if oil falls below US$70-75/bbl.