OMCs to lose 20% of earnings due to duty hike: Antique

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OMCs to lose 20% of earnings due to duty hike: Antique

In an interview with CNBC-TV18, Amit Rustagi, Oil & Gas Analyst, Antique Stock Broking, spoke about the Budget impact on oil and gas companies.

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Excerpts from Markets Midday on CNBC-TV18 Watch the full show » RELATED NEWS Refining profitability will be hit due to duty hikes: IOC Stay away from oil stocks: Akash Prakash ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Reliance BSE | NSE 29/05/12 Are Mutual Funds betting on Reliance? Other Stocks in this news Hindustan Petroleum Corporation | Bharat Petroleum Corporation | Indian Oil Corporation | Oil and Natural Gas Corporation | Oil India |

In an interview with CNBC-TV18, Amit Rustagi, Oil & Gas Analyst, Antique Stock Broking, spoke about the Budget impact on oil and gas companies.

Here is a verbatim transcript of an exclusive interview with Amit Rustagi on CNBC-TV18. Also watch the accompanying video.

Q: To start out with Reliance and Cairn Energy, have you got some numbers about the difference in their tax calculations and their book calculations? How big is the gap? Is 18% of your book seems amazingly significant? Are they already paying an effective tax rate of 18 plus or are their companies out there that have a real problem now if they have to stop paying on their book?

A: It is always on the book profits which they have been paying. They have been earlier 15% of their book profits as per the earlier rates of minimum alternate tax (MAT). Now they would be paying 18% of their book profits, which will be around Rs 3 per share in terms of EPS impact for Reliance Industries.

Q: Talking about refining companies, at the end of increase in duties on crude oil and petrol both custom and excise and the price hike they are literally where they were before all these hikes. Where does it leave them in terms of their EPS?

A: Refiners have been impacted because of increase in custom duty, on crude and on the products because earlier they were enjoying a higher duty protection, which now has been reduced to merely 5% which have been 1.5-2% earlier. If you look at Oil Marketing Companies (OMCs), the impact on EPS could be somewhere around Rs 10-12 per share for HPCL and BPCL and Rs 4 per share for IOC , which is almost 20% of their current earnings.

Q: What are the chances that for some of these oil marketing companies this may create a cash flow problem because first you don't let them charge anything which is their reporting numbers that are not real numbers to start out with, they are unable to collect cash, now you go ahead and say pay on your book 18% can it cause some real cash flow problems specially for OMCs since they are already cash strapped to start out with?

A: For OMCs, there will be no problem in terms of MAT because they are not paying on the book profits. They are paying on the actual profits on corporate rate tax. It's only for those companies which are exempt from tax because of either they have a SEZ refinery or they have new production from oil fields. So Reliance Industries and Cairn India will be paying on the book profits, 18% of MAT but OMC have always been paying on the actual profits.

Q: Reliance, where depreciation is huge, has set up refineries. They are setting up pipelines and are leveraging that as allowed by the law maximum amount for tax because you get even added benefits to report for infrastructure. So you take huge tax deductions but on the book you don't do it because you have got shareholders and they have better numbers. What happens here, especially in the case of Reliance where the gap between book and tax income could be huge? How significant do you think could this be an impact keeping in mind the kind of capital expenditure and depreciation that they would have build up on the tax side?

A: This won't be a significant impact on Reliance because they have been paying on the book profits. Earlier, they have been paying 15% on the book profits, which is on different computation as per the income tax law. It is not the reported profit by the company and now they will be paying 18%, so its 3% jump which they have been paying over an above earlier. If you look at the cash flows for the company, it will not be impacted significantly, it is almost Rs 900 crore which they have to pay additional and a 2-3% impact ton their EPS.

MAT credit is also available to them whatever they pay right now under MAT on their book profits will be eligible for a tax credit when they start paying tax as per corporate rates.

Q: How will Budget impact ONGC and Oil India ? What are your new EPS calculations and what is your recommendation on both those stocks?

A: For ONGC, it will be slightly positive because of an increase in customs duty to 5%. ONGC priced their crude based on import parity price. Hence, their net realizations will go up by 2-3% and we have revised our earnings for ONGC from Rs 108 per share to Rs 112 per share and maintain our buy with revised target price of Rs 1,445.

While there will be no significant change of Oil India because they don't price their crude based on import parity price. They just charge the benchmark price, so there will be no impact on Oil India. ONGC will also benefit from reduction in corporate surcharge rates from 10% to 7.5%.

Q: With regards to companies that provide offshore rigs or have rigs that they want to install, what happens there because many of them use capital lease structure of tax and operating lease structure for books? How significant as an impact for operations that support Oil and Gas, perhaps oil rigs, perhaps guys who do the diving?

A: One thing that has changed is that now there will be service tax on the services which you hire in exploration because they have changed the net from imported services to whether provided into India. All those offshore companies which are hired in India they have to pay service tax on their services. So that will be quite a negative impact for ONGC and RIL because they hire lot of these services and the cost of these services will go up.