ONGC, Oil India dip 4% on profit booking after hike in windfall tax

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Shares of state-owned oil exploration & production companies Oil and Natural Gas Corporation (ONGC) and Oil India slipped 4 per cent on the BSE in Thursday’s intra-day trade after the government hiked the windfall tax on petroleum crude to Rs 6,800 a metric ton from Rs 4,900 with effect from April 4.


The windfall tax, which is revised fortnightly, remains at zero for diesel and aviation turbine fuel.


The government has raised its windfall tax on petroleum crude for the fifth time since February. On March 15, the government raised the windfall tax on petroleum crude to Rs 4,900 a metric ton from Rs 4,600, the Reuters reported.


Shares of ONGC dipped 4 per cent to Rs 265.40, while Oil India was down 3.5 per cent to Rs 613 on the BSE in Thursday’s intra-day trade. At 12:50 PM, these stocks were trading lower by 3 per cent and 2 per cent, respectively. In comparison, the S&P BSE Sensex was up 0.08 per cent at 73,938.


Thus far in the calendar year 2024 (CY24), the stock price of Oil India has zoomed 71 per cent, while ONGC rallied 41 per cent. During this period, the S&P BSE Sensex was up 2.3 per cent.


The downturn in stock prices comes amid government’s ad-hoc tax policy changes for the oil and gas sector in the volatile crude oil price environment. The policy changes have raised concerns over the earnings outlook of upstream PSUs and are a divergence from the government’s earlier intent of doing away with an oil subsidy mechanism.


The government has introduced a windfall tax in the form of a fixed cess rate, which is in addition to the current ad valorem effective cess rate of 16.67 per cent on the realised oil price for upstream PSUs. Additionally, a cap of $6.5/mmBtu on domestic gas prices would further limit earnings growth for upstream PSUs.


The brokerage firm Sharekhan sees a risk-reward scenario turning favourable for Oil India, given its a healthy earnings outlook for the core oil and gas E&P business, led by a likely increase in oil and gas production over FY25-26. Additionally, the potential value creation from Numaligarh Refinery’s expansion to 9mtpa(from 3mtpa currently) is also an advandage.


Management’s robust oil and gas production guidance bode well for earnings growth of core E&P business. OIL’s plan for 3x capacity expansion for NRL would create significant value for its shareholders and OIL’s current market capitalization does not fully reflect the value of NRL post expansion. The stock is available at a reasonable valuation and offers healthy dividend yield, the brokerage firm said in a stock update. It upgraded OIL to ‘Buy’ (from Hold) with target price of Rs 755 per share.


Meanwhile, the rating agencies have a ‘Stable’ outlook on the rating of ONGC’s instruments on opinion of the company’s dominant position in the domestic exploration market, and expectations that the Maharatna PSU will continue to maintain a healthy financial risk profile owing to its status as the largest oil producer in the country.


ONGC in its Q3FY24 earnings call said that the crude oil production has already commenced from KG-98/2. Hopefully, the company would be better placed with oil in the last quarter of this financial year(Q4FY24) and gas in the coming FY25. The price for gas in the coming financial year would improve as compared to FY24, the management said.

First Published: Apr 04 2024 | 1:54 PM IST



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