JP Morgan downgraded ONGC to Neutral with a revised price target of Rs155 vs 20 earlier. JP Morgan sees the imposition of the large fixed additional tax of $40/bbl as sharply negative for the company’s earnings given that the new levy is not linked to oil prices.
Additionally, lack of clarity on when the tax would be removed adds another overhang. JP Morgan refrains from downgrading stock to an outright Underweight as they expect the near-term dividend yield (~7%) to provide downside support.
In the brokerage house’s view, Government’s new cess of $40/bbl (not applicable on incremental production) is sharply negative and drives 32% FY23 EPS cut and 26% EPS cut for FY24 despite upward revision in crude prices.
They believe that the tax is negative for two reasons: a) the $40/bbl is very large and takes the total cess (16.67% of Brent) and taxes total to as much as $58/bbl; b) the bigger negative is that the tax is fixed and not linked to the crude price. Hence if oil prices were to fall, ONGC’s taxes would NOT fall, and earnings would fall sharply if Brent prices were to go below $100/bbl. Important to note, that in an interaction aired on ET NOW, the Finance Minister highlighted that all of the imposed taxes would be reviewed every 15 days.
JP Morgan does NOT see this as a case for holders to completely exit as a) they expect Brent prices to remain firm and see upside risk to Brent prices; b) implied dividend yield is 7% should provide a floor to the stock price. Going forward, they are watchful of the gas price change in October which could be a possible trigger for the stock. The share of ONGC slipped over 3% on Friday post implementation of production levy.
