After a windfall tax cut, ONGC and Reliance will soar: Morgan Stanley

According to international stockbroker Morgan Stanley, a surprising reduction in additional taxes levied on fuel exports and crude oil production has boosted the sector's prospects.

"Equity multiples should normalize progressively higher if the sector's windfall taxes are reversed sooner than anticipated. Even though there are still some windfall taxes, we think that government action makes the future's course clear. The main winners are Reliance Industries, ONGC, and Oil India, according to Morgan Stanley equities analyst Mayank Maheshwari.

There have been discussions about the government considering lowering or abolishing taxes, but few anticipated it would happen so quickly. The sudden action resulted in gains for the stock market on July 20.

At the start of trading, the benchmark Sensex on the BSE rose 587 points, or 1.07 percent, to 55,355, led by a gain of more than 2 percent in Reliance and some significant buying in large-cap IT stocks. Oil India was up 7%, Mangalore Refinery was up 5%, ONGC was up 5%, and Chennai Petroleum was up over 8%.

The Center eliminated a Rs 6 per liter tax on gasoline exports and decreased the windfall tax on diesel and aviation fuel shipments by Rs 2 per liter. Additionally, it reduced the tax on crude that is produced domestically by around 27%, to Rs 17,000 per tonne.

"While the windfall taxes are still high in absolute terms, we believe that steady normalization in local fuel availability (the government's top energy security concern), stability in oil prices, more normalized global fuel margins, and currency stability will help further reduce the windfall taxes."

"Taxes are being reviewed every two weeks," Maheshwari said.

Due to the high global prices of crude oil and oil derivatives, taxes were implemented to take a piece of the windfall profits that oil companies were making. Some businesses' refining margins hit all-time highs.

Reliance, Oil India, and ONGC will experience a decrease in overhang now that taxes have been somewhat rationalized, and equities prices should begin pricing in high sustainable energy margins as the government's aim becomes obvious, according to Maheshwari. The tax cut also allies investor worries about a possible stock downgrading cycle in an environment of weak demand.

"We think ONGC should be priced at $75-80 per barrel of oil and $6 per MMBtu commodity deck, whereas Reliance should be priced at $13–15 per barrel (bbl) sustainable refinery margins. Given that energy markets are anticipated to stay tight despite the present oil price volatility and a decline in global fuel margins from peak levels, the two should suggest a 25–40% increase in stock prices, he continued.

Reliance's current gross refining margins, according to Morgan Stanley, are $13 per barrel. It believes that ONGC is making $25 per barrel of oil, a 20 percent increase over last year's figures.

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