Buy / Sell Reliance share
A potential waver of windfall tax or export duty on diesel and aviation fuel in the wake of a correction in the global oil prices, will remove a key regulatory overhang on India's oil refining and oil exporting companies, says brokerage firm Jefferies.
Industry analysts from the brokerage expect that the operating profit or EBITDA of Reliance Industries, the country's largest private oil producer and refiner, to receive a 5 percent or $1 billion boost in the upcoming financial year, if export duties on diesel and aviation fuel are withdrawn.
With oil prices having corrected nearly 30 percent since the end of June, Jefferies is expecting a complete withdrawal of these export duties, which according to them, are still elevated despite the moderation in Singapore GRM (gross refining margin).
Even though the government had reduced the duty by about 13 percent from November onwards, exports of diesel and ATF (aviation fuel) still attract export duties of $20/bbl and $10/bbl respectively.
The windfall tax levied as special additional excise duty was aimed at absorbing the super profits earned by domestic crude oil producers when the oil prices peaked and these duties get revised every fortnight.
The firm has maintained its buy recommendation on the stock and marginally raised its price target to Rs 3,100 from Rs 3,090.
Export duties on refined products - gas, diesel and ATF were announced in July when the Singapore GRM traded near record highs of $25 per barrel. Since then, the GRM has corrected nearly 60 percent, eliminating any room for windfall gains. However, export duties on diesel / ATF have only been reduced by close to 20 percent.
Jefferies believes that China's reopening remains a key criteria for refining margin to sustain in calendar year 2023. Renewed lockdowns in the country as it reports record Covid-19 cases have clouded the demand outlook. Lower Indian exports, due to the imposition of the export duty is supportive of margins, according to Jefferies.
The brokerage estimates a $2 per barrel impact on Reliance's overall refining margins due to the ongoing export duties.
Here's the other rationale for Jefferies' bullish stance on Reliance Industries:
Sustainable competitive advantage on scale economics, cost leadership, financial strength
Rs 2 lakh crore free cash flow invested in the consumer businesses has created equity value worth Rs 9 lakh crore
New growth engines with large addressable markets
Interesting optionalities with likely financial services foray and partnerships with Meta Platforms, Google.
For its base case price target of Rs 3,100, Jefferies expects this compounded EBITDA growth until financial year 2025 for RIL's various segments:
Jio: 27 percent, helped by 47.5 lakh subscribers at an ARPU of Rs 210
Retail: 32 percent
Refining: 12 percent
Petchem: 4 percent