New cesses on crude oil and export of MS, HSD and ATF credit negative for the incumbents: ICRA

On July 1, 2022, the GoI imposed a cess of Rs 23,250/tonne on the domestic sales of crude. As per ICRA, the cess is credit negative for the Upstream producers as it reduces the realisations on crude by about $40/barrel adversely impacting the profits and cash accruals. Exceptions are that no cess will be imposed on such quantity of crude that is produced in excess of last year's production volume by a crude producer. Also, no cess is imposed on the small producers, whose annual production was below 2 million barrels in the preceding financial year.

According to Mr. Sabyasachi Majumdar, Senior Vice President and Group Head - Corporate Ratings, ICRA Limited, "The cess imposed on crude oil, which is in the nature of windfall tax levied by several countries lately in response to elevated crude prices, is quite steep at about $40/barrel and would adversely impact the EBITDA of the Indian Upstream industry by about Rs. 518 billion for FY2023. However, ICRA expects that the capex plans of the incumbents would remain largely intact owing to the still remunerative realisations of $60-80/barrel for crude post the imposition of the cess. The rating agency expects crude prices to remain in the range of $100-120/barrel for FY2023 owing to increasing demand as lockdowns ease globally, under-investment in the Upstream sector for the past several years and limited spare capacity. Additionally, it expects the cess to be rolled back in case crude prices decline."

Besides, the cess on crude, the GoI also imposed cesses on exports of HSD (of Rs. 13/litre), MS (of Rs. 6/litre) and ATF (of Rs. 6/litre) by way of special additional excise duty. The exporter is also required to submit a self-declaration confirming that 50% of the quantity mentioned in the shipping bill will be supplied/has been supplied in the domestic market for MS and 30% for HSD. The GoI has further clarified that the newly introduced taxes would be applicable on the SEZ units.

Adds Mr. Majumdar, "The Special additional excise duty imposed on export of MS, HSD and ATF is negative for the exporters of these products and would adversely impact the realisations on export sales. The impact on the overall GRMs of exporters is expected to be in the range of $2/barrel to $8/barrel depending on their proportion of exports. Nevertheless, the refiners are still expected to post robust GRMs in FY2023 as ICRA expects crack spreads on the above products to sustain at elevated levels owing to increasing demand, reduced export quotas by China, closure of about 4 million barrels per day (mbd) refining capacity since the beginning of Covid and reduced refining throughput in Russia. As per IEA, the Russian refining throughput is expected to reduce by about 1.1 mbd due to the sanctions by EU. Nevertheless, the domestic supply obligations of the exporters would provide some succour to the PSU oil marketing companies who were witnessing increased offtake due to lower sales by the private refiners."

Source : Equity Bulls

Keywords

Cess CrudeOil Exports Diesel ATF CreditNegative ICRA