Reliance Industries’ refining margins may be hit by new govt tax, but analysts still bullish on RIL stock

Reliance Industries’ share price tanked 7% on Friday and traded flat on Monday as investors reacted to the government’s new taxes on petrol, diesel, and ATF export.


Reliance Industries’ share price tanked 7% on Friday and traded flat on Monday as investors reacted to the government’s new taxes on petrol, diesel, and ATF export. Apart from the tax on exports, the government of India has also imposed a windfall tax on domestic oil producers and asked them to sell 30% of their diesel domestically. While analysts project some refining margin hit for Mukesh Ambani-led Reliance Industries, most remain optimistic on the stock and have reiterated their ‘buy’ calls. “Export taxes/restrictions and windfall taxes on oil producers are a global trend and highlight the tightening energy market outlook,” said Morgan Stanley in a note. 

Refining margins take a hit

Morgan Stanley said that India’s announcement on export duty and windfall tax is incrementally negative for sector valuations while adding that ONGC will be most negatively impacted. They added that RIL can manage the changes better. According to the new taxes, exports of petrol will be taxed at Rs 6 per litre and diesel at Rs 13 per litre. “Export-oriented units like RIL will have to sell 30% of diesel locally to not attract this tax,” Morgan Stanley said. RIL has a total refining capacity of 68 MMTPA and one of the refineries is export-focused, according to ICICI Direct. The domestic brokerage firm predicts limited gains in the refining segment for RIL, going ahead.

On the other hand, Jefferies said that RIL’s refining margins can take a hit up to $7/bbl. “With Reliance exporting ~ 58% of refined products, we estimate a potential $ 7/bbl impact on refining margins. We await confirmation whether its SEZ refinery is exempt which would limit the downside to just $ 1/bbl. If its SEZ is exempt, we would see this as a more attractive buying opportunity,” they added.

“RIL currently via its petrochemical, B2B and retail fuel stations sells about 40-50% of its products locally. However, the sales are heavily naphta weighted and we still await details on RIL’s diesel sales locally,” said Morgan Stanley. They added that assuming the full impact of the regulations on both diesel and gasoline, RIL’s GRM would be negatively impacted by US$6-8/bbl realistically against last week’s margin of US$24-26/bbl. “This would still be above our base case estimates on earnings. Every US$1/bbl impacts RIL’s earnings by 2.5-3%,” they added. 

Oil remains RIL’s cash cow

Although Mukesh Ambani’s RIL has ventured into the digital realms along with retail and business has been doing good in those verticals, Oil to chemical business remains the cash cow. “At the EBITDA level in FY22, O2C and oil & gas contributed 49% while retail, digital and others contributed 10%, 34% and 7%, respectively,” ICICI Direct said. 

Target price

ICICI Direct said that the long-term prospects and dominant standing of RIL in each of its product & service portfolios, provide comfort for long-term value creation. With a Buy rating, ICICI Direct has a target price of Rs 2,800 per share on Reliance Industries. Meanwhile, Jefferies has pinned the target price at Rs 2,950 per share on RIL, implying an upside of 23.5% from today’s opening price.

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