The government raised the royalty on onshore crude oil production to 13.33%, partially reversing the cut to 10% announced in May. While the new rate remains below the earlier 16.67% level, the move surprised the market. Royalty rates for offshore production remain unchanged, and existing ad valorem deductions of 20% for nominated blocks and 15% for other blocks continue.
While the revised royalty rates are a bigger negative for Oil India than for Oil and Natural Gas Corporation (ONGC), Ghuge believes the market has largely factored in the impact. “I think, with the 10% correction in Oil India, it’s already factored in,” he said.
Despite the near-term setback, Ghuge remains constructive on Oil India’s earnings outlook. He expects growth to be driven by higher oil and gas production as well as the ramp-up of Numaligarh Refinery (NRL). “So, in fact, it’s a good opportunity with this 10% correction in Oil India stock,” he added.
The broader backdrop also remains supportive for upstream oil companies. According to Ghuge, elevated crude oil and gas prices should continue to benefit Oil India and ONGC over the next few months. However, he cautioned that government intervention remains a key risk.
“We are of the opinion that upstream companies may chip in some, so that they will compensate the losses that oil marketing companies are currently incurring,” he said, referring to the pressure on fuel retailers from losses on petrol, diesel and liquefied petroleum gas (LPG) sales.
That brings the focus to oil marketing companies (OMCs) such as Hindustan Petroleum Corporation (HPCL) and Indian Oil Corporation (IOC). While these companies are facing short-term pressure due to losses on fuel sales, Ghuge expects support to come either through gradual fuel price increases or government compensation if oil prices remain elevated.
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He is also positive on the refining business, which could become a key earnings driver for OMCs. Expansion projects, including both brownfield and greenfield capacity additions, are expected to start contributing this year and support profitability.
In short, while the royalty hike has weighed on sentiment, Ghuge believes the recent correction in Oil India may have created value for investors. At the same time, higher energy prices and refining-led growth could help the broader oil and gas sector absorb the impact of the government’s latest move.
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