Windfall tax: RIL’s refining margins to be hit by upto $8/bbl, say analysts

With the government making it clear that the new windfall tax will also be imposed on special economic zones, Reliance Industries’ gross refining margins (GRMs) will be negatively impacted by $6-8 a barrel, said analysts with Morgan Stanley and Jefferies.

“No sunset date has been specified, although we believe this is an extraordinary measure given the inflated profit environment in refining today. Gasoline and diesel are the key contributors to Reliance’s refining slate contributing 72 percent of refining throughput. We estimate $7/bbl blended impact on RIL excluding any exemption. With 58 per cent of RIL’s refined products being exported, the blended impact for Reliance could be Rs 3.4 a liter translating to $7 a barrel impact on realized GRM,” a report by Jefferies said.

The government has imposed a sharp windfall tax of Rs 13 per liter on diesel exports and Rs 6 per liter on gasoline exports. Reacting to the announcement, RIL’s shares lost 7 percent or Rs 1.25 trillion of its value on Friday with the total market valuation at Rs 16.29 trillion. Of this, the promoters’ net worth was eroded by Rs 61,497 crore.

Apart from windfall tax, the government also announced multiple steps to secure fuel supplies within the country against rising shortages of global diesel and gasoline supplies. India has made compulsory sale of half of refined products domestically for refiners. This, however, does not apply to SEZ refiners like RIL. RIL has two refineries in Jamnagar with one refinery set up as an exclusive special economic zone. The SEZ refinery has a capacity for processing 580,000 barrels a day of crude.

According to the plan, export-oriented units like RIL will have to sell 30 percent of diesel locally so as not to attract this tax. RIL currently, via its petrochemical, B2B and retail fuel stations, sells about 40-50 percent of its products locally. However, the sales are heavily naphtha weighted and Morgan Stanley analysts say they are still awaiting details on RIL’s diesel sales locally.

“Assuming the full impact of the regulations on both diesel and gasoline, RIL’s GRM would be negatively impacted by $6-8/bbl realistically vs last week’s margin of $24-26/bbl. This would still be above our base case estimates on earnings. Every $1/bbl impacts RIL’s earnings by 2.5-3 per cent. Most other refiners largely sell locally and the impact on earnings will be limited,” said an analyst with Morgan Stanley.

Overall, India exported 42 percent of its diesel and 44 percent of its gasoline production in FY22 and 40 percent of its diesel and 44 percent of its gasoline production year to date.

Reliance has not commented on the impact as yet.

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