Budget Impact - Oil & Gas Sector

Oil & Gas:

THE HIKE IN CUSTOMS AND EXCISE DUTY TO CUT INTO THE PROFIT OF MANY REFINING COMPANIES.
*Increase in MAT by 3%.
*Hike in custom duty on crude oil and other refined products.

*A Re 1 hike in excise duty on petrol and diesel.

The rise in customs and excise duties is expected to have a negative impact on refineries. Under-recoveries for the refiners is expected to increase by Rs 13,200 Cr in 2010-11 and Rs 14,100 Cr in 2011-12 due to the rise in custom duty. The Re 1 rise in excise duty is expected to increase under-recoveries for refiners by Rs 10,600 Cr in 2010-11 and Rs 11,400 Cr in 2011-12. According to Religare Hichens, increase in minimum alternative tax is expected to negatively impact Reliance Industries' earnings per share (EPS) by Rs 2 in 2010- 11 and Rs 3.8 in 2011-12. The EPS of Cairn India is expected to get negatively impacted by Re 1 in 2010-11 and Rs 1.4 in 2011-12.

Impact: The hike in customs duty will have a negative impact on Reliance Industries and oil marketing companies like Essar Oil and MRPL but it is positive for ONGC and Oil India.

COMPANIES MAY PASS ON THE INCREASE IN COST DUE TO HIGHER EXCISE DUTY TO THE CONSUMER.

The Budget failed to address the under-recovery issue and the Finance Minister indicated that a decision on Kirit Parik Committee recommendations will be taken in due course by the Petroleum Ministry. Nevertheless, apart from the industrywide changes in MAT rate and surcharge, there were few sector-specific duty changes.

A] Customs duty on crude hiked from nil to 5%:

The Budget has proposed an increase in customs duty on crude from nil to 5%. Earlier in June 2008, the government had reduced customs duty from 5% to nil to give some respite to oil companies from higher crude prices (Brent had peaked at US$147/bbl v/s last 6-month average of US$74/bbl).

B] Duties on petrol and diesel hiked:

An increase in customs duty on petrol and diesel from 2.5% to 7.5% and from 5% to 10% on other refined products is proposed. Also, specific duty hike of Rs1/liter on petrol and diesel is proposed.

C] MAT rate increased to 18%, surcharge lowered:

*MAT would increase from 15% to 18%. This is the second consecutive year of MAT rate hike; in FY10, MAT was hiked from 10% to 15%.

*Surcharge on income tax is reduced from 10% to 7.5%. For a full-tax paying company, tax rate will reduce from 34% to 33.2% and for a MAT paying company tax rate will increase.

D]Clarity on subsidy sharing post decision on Parikh Committee recommendations:

*During 9MFY10, upstream shared 100% of the auto fuel under-recoveries and the government compensated Rs120b to OMCs as against domestic fuel losses of Rs209b.

*The Budget document indicates Petroleum Ministry demand of Rs253b towards subsidy to OMCs as against estimated domestic fuel losses of Rs311b. However, clarity on the final FY10 subsidy would only emerge post decision on the Kirit Parikh Committee recommendations.

Impact:
*Additional customs duties will fetch Rs155b and increase in excise duties on petrol and diesel will fetch Rs86b for the government.

*Retail prices of petrol and diesel have been increased by Rs2.7/liter and Rs2.5/liter, respectively, neutralizing the impact of increase in duties.

*EPS estimates for RIL will be reduced by ~3.5% and increase for ONGC by ~3% for FY11 and FY12. We will wait for more clarity on Cairn and OMC's before revising our estimates. The Budget does not impact GAIL, IGL and GSPL.