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Govt announced windfall tax on all refiners (including SEZ refineries) on export of diesel, petrol and ATF at the rate of INR 13/ltr on diesel and INR 6/ltr on petrol and ATF. The likely hit on RIL’s GRM could be USD 7-8/bbl and hit to EBITDA could be INR 300-310bn on an annualised basis. However, our FY23-24 estimate and TP of INR 3,000 remains unchanged as we were conservatively factoring RIL’s GRM at only USD 12.5/bbl in FY23 (and USD 11.0/bbl in FY24). However, we agree this might end the likely earnings upgrade cycle that the street was expecting if the current high refining margin was to sustain. Further, this this could pose risk to RIL’s earnings if the govt delays reversal of this cess despite moderation of GRMs to USD 10-15/bbl (from current high USD 20-25/bbl). Finance Minister said they will review the situation every 15 days and should get reversed as oil prices normalise.

Further, govt imposed a cess of ~USD 40/bbl on domestic crude output, taking away the windfall gains made by upstream companies. This will mean ONGC and Oil India’s net crude realisation will decline to ~USD 70/bbl vs ~USD 110/bbl that they were currently making. We were already factoring net crude realisation of ~USD 65/bbl for ONGC and Oil India for FY23 and FY24. However, this could pose risk to earnings if the govt delays reversal of this ~USD 40/bbl cess in the event of fall in crude price (to below USD 100/bbl). We maintain BUY on ONGC (TP: INR 210) and Oil India (TP: INR 280) as CMP is discounting net crude realisation of ~USD 50/bbl. Government is likely to get monthly revenue of INR114bn from windfall tax on oil (INR 55bn from cess on exports and INR 59bn from cess on domestic crude output); this could potentially offset OMCs monthly net loss of INR 117bn on sale of petrol/diesel.

* Govt announced windfall tax on all refiners on entire exports of diesel, petrol and ATF by all refineries including SEZ refineries: Govt announced that it will levy special additional excise duty (SAED) on all refiners on entire exports of diesel, petrol and ATF at the rate of INR 13/ltr on diesel exports and INR 6/ltr on petrol and ATF exports (implies USD 26/bbl on diesel and USD 12/bbl on petrol and ATF). This is to tax the windfall gains made by refiners on exports of diesel, petrol and ATF as product cracks have expanded to USD 40- 50/bbl vs sub USD 20/bbl historically (Exhibit 3); this is also to ensure adequate availability of fuel in domestic market on reports of fuel shortage in few states. The Finance Minister in an interview clarified that this SAED will be applicable on exports from SEZ refineries as well; however clarified this are temporary measures and will be reviewed on a fortnightly basis and should get reversed as oil prices normalise.

* Impact of USD7-8/bbl on RIL’s GRM and INR 300-310bn on EBITDA; however no change in our estimate and TP as we were factoring only USD 12.5/bbl GRM: Out of RIL’s total refining throughput of ~70mmtpa, we estimate exports of diesel, petrol and ATF might be ~26mmtpa (as earlier disclosure suggested refined products exports used to be ~40mmtpa, and it can be reasonably assumed that diesel, petrol and ATF might constitute 40%, 15% and 10% respectively). Hence the likely hit on RIL’s GRM (gross refining margin) could be ~USD 7-8/bbl and hit to EBITDA could be ~INR 300-310bn on an annualised basis (Exhibit 1-2). However, we were conservatively expecting RIL’s GRM at USD 12.5/bbl in FY23 (and USD 11.0/bbl in FY24) as we were not expecting current high USD 20-25/bbl GRM to sustain (vs 10 year average S’pore Dubai GRM of ~USD 6/bbl). Hence, there is not much impact on our FY23-24 earnings estimate for RIL; our TP is also unchanged at INR 3,000/share. However, we agree that this windfall tax might end the likely earnings upgrade cycle that the street was expecting if the current high refining margin was to sustain. Further, this windfall tax could pose risk to RIL’s earnings if the govt delays reversal of this cess despite moderation to GRMs to USD 10-15/bbl (from current high USD 20-25/bbl). Finance Minister said they will review the situation every 15 days and should get reversed as oil prices normalise. For every USD 1/bbl change in RIL’s GRM, its consolidated EBITDA will change by ~INR 40bn (or ~3%) on an annualised basis. We reiterate BUY given RIL’s industry leading capabilities across businesses and expectation of strong 18-20% EPS CAGR over the next 3-5 years — A Giant Digital Leap. At CMP, the stock is trading at FY24E P/E of 20.4x (3 yr avg: 22.0x) and FY24E EV/EBITDA of 11.1x (3 yr avg: 12.6x).

* Govt imposed a cess of ~USD 40/bbl on domestic crude output, taking away the windfall gains made by upstream companies: Govt announced that it will impose a cess of INR 23,250/ton (or ~USD 40/bbl) on all domestic crude output given the windfall gains made by upstream companies (ONGC, Oil India and Cairn India) due to sharp rise in global crude price. This will mean ONGC and Oil India’s net crude realisation will decline to ~USD 70/bbl (gross realisation of ~USD 110/bbl based on current global crude price less USD 40/bbl of cess) vs ~USD 110/bbl that they were currently making. However, we were only factoring net crude realisation of ~USD 65/bbl for ONGC and Oil India for FY23 and FY24; hence the ~USD40/bbl cess doesn’t pose major downside risk to our earnings assuming crude price stays ~USD 105-110/bbl. However, this could pose risk to earnings if the govt delays reversal of this ~USD 40/bbl cess despite fall in crude price (to below USD 100/bbl). ? Maintain BUY on ONGC and Oil India as CMP discounting ~USD 50/bbl of net crude realisation: We have cut our FY23 consolidated EBITDA estimate for ONGC by 6% to factor in the higher cess and royalty as its applicable on gross crude realisation (of ~USD 110/bbl at current crude price vs our earlier assumption at ~USD 80/bbl); however FY24 EBITDA has seen only a marginal cut of ~1.5% as we maintain our Brent crude assumption at USD 65/bbl from FY24 onwards and assume that the USD 40/bbl one time cess will be fully removed once crude price stabilises at ~USD 65/bbl. Similarly for Oil India, our FY23/FY24 EBITDA have been cut by ~13%/3% respectively. Our revised TP stands at INR 210 for ONGC (from INR 220 earlier) and at INR 280 for Oil India (from INR 300 earlier). Maintain BUY on ONGC and Oil India as CMP is discounting net crude realisation of ~USD 50/bbl (Exhibit 21-24).

* Government to get monthly revenue of INR 114bn from windfall tax on oil — this compares with OMCs current monthly net loss of INR 117bn on auto-fuel: Government is likely to get monthly revenue of INR114bn from windfall tax on oil via combination of: a) INR 59bn per month from cess on domestic crude output; and b) INR 55bn per month from cess on exports of diesel/petrol/ATF (Exhibit 9-11). This compares to OMCs monthly net loss of INR 117bn on sale of petrol/diesel (net loss of ~INR 10/litre multiplied by 11.7bn litre monthly consumption of petrol/diesel) based on spot crude price of ~USD 110/bbl and normalised diesel/petrol product cracks of ~USD 20/bbl. Please note for computing net loss on petrol/diesel sales, we have not assumed OMCs current high marketing loss of INR 20-25/ltr on petrol/diesel based on current high product crack of USD 40-50/bbl as OMCs may not be compensated for this abnormal product cracks given this is offset by windfall gain on refining business. The Finance Minister in an interview clarified that this temporary windfall tax has been imposed due to current extraordinary times; and they will review this on a fortnightly basis and reverse as oil prices normalise. We believe govt mostly might reverse above measures if: a) crude settles at lower level ~USD 90/bbl or below (vs current ~USD 110/bbl); and b) petrol/diesel cracks settles at lower level of ~USD 20/bbl or below (vs current ~USD 40-50/bbl) as OMCs will start making normal gross marketing margin of INR 3-3.5/ltr on petrol/diesel at USD 90/bbl of crude and USD 20/bbl of petrol/diesel crack level (assuming retail petrol/diesel prices remains unchanged).

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