“If demand is robust and if raw material has been sourced at various sources, will make 10-year average profit margins still on the refining division irrespective of the tax,” says Sushil Choksey, CEO, Indus Equity Advisors.
When the Reliance stock fell, the assumption was that this tax will not apply if you had presence in the SEZ. Reliance stock reacted on the downside, then once the notification was understood by the market, it also rallied. But now the finance minister has made it completely clear that there is going to be no benefit to a company like Reliance even though they have a presence in the SEZ. Where do you think the stock will settle now and has a de-rating starting in Reliance?
Basically the sentiment is impacted whereby the windfall business gains which were coming out of exports of diesel, petrol or other value-added petroleum products which Reliance was able to capture from buying crude at a cheaper rate from various sources.
When the Reliance stock fell, the assumption was that this tax will not apply if you had presence in the SEZ. Reliance stock reacted on the downside, then once the notification was understood by the market, it also rallied. But now the finance minister has made it completely clear that there is going to be no benefit to a company like Reliance even though they have a presence in the SEZ. Where do you think the stock will settle now and has a de-rating starting in Reliance?
Basically the sentiment is impacted whereby the windfall business gains which were coming out of exports of diesel, petrol or other value-added petroleum products which Reliance was able to capture from buying crude at a cheaper rate from various sources.
If the GRM on Singapore basis was being assumed at 25 and if the government is taking say 1/3rd of it as tax, then Reliance will end up at 15-17, in the EBITDA range. Whereas the last five years’ GRM margin of Reliance in refining business has hovered around 8-10 and previously it used to be around 12. If one takes the mean average of the last 10 years, Reliance’s margin would still exceed the 10-year average.
Secondly, keep in mind this is a 20-year old asset still making super abnormal profit. So, if they are paying something, it is fine and Reliance has maintained the production level at 72-73% on a constant basis with a 10% plus and minus band and the value of the stock on refining and petrochemical on a combined basis on the higher side may be 800, lower side maybe 650.
Has the law changed permanently? No, right? So why are we assuming that this is going to be changed in the full year estimate? This is a moving part. Was there extraordinary benefit to Reliance GRM because of what is happening to global GRMs? Yes. Will this policy be reviewed? It will be. Markets are assuming that is an impact on EBITDA and then stretching it by four quarters and multiplying it by 365 days and making the earnings assumptions lower. That is unfair.
I agree with you that GRMs are 200% higher than the long term averages Reliance has achieved in over last 10 years. A certain percentage of that will be taken out as tax. So a historical GRM of 10 will become 12 or 15 this year, but still be almost 200% higher than last year.
It is a number possibly in the refining division which is being valued at Rs 350 a share. It may get scaled to Rs 300 or Rs 275, but it is not that it is going to wipe out Rs 200 per share on the division itself. Second, over a period of time with Reliance or any company, where oil and gas is concerned and where India’s production has to be high, the government will have to allow Indian companies to increase production.
from 1980 till 2022 has not been able to increase that 25-30 million tonnes of production; So ONGC or Reliance has to make that kind of 100% leap in production and they have to earn and spend more money for developments.
Whether the government’s thinking is right or wrong, only time will tell us but unless they are already factoring in that Reliance will make hydrogen, solar and various other things, where we will not need oil at all. ExxonMobil Chairman in an interview recently said on a global basis, 50% of the global oil is not only going into cars and it is going to various manufacturing businesses. One has to look at what aspect oil and gas has on the subject and where the demand is.
If demand is robust and if raw material has been sourced at various sources, Reliance will make 10-year average profit margins still on the refining division irrespective of the tax.
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